A PROJECT REPORT ON

FINANCIAL STATEMENT ANALYSIS

IN
BHARAT HEAVY ELECTRICALS LIMITED
(RAMACHANDRAPURAM,HYDERABAD-500032)
A Project Report submitted in partial fulfilment for the award of the degree of
MASTER OF BUSINESS ADMINISTRATION
BY
P.Mahesh
(1409-10-672-050)
MBA
UNDER THE GUIDANCE OF
MR. P.V.ARUN KUMAR
MANAGER(FINANCE & ACCOUNTS)

DVR PG INSTITUTE OF MANAGEMENT

KASHIPUR VILLAGE, SANGAREDDY MANDAL,
MEDAK Dist - 502 285

ANDHRA PRADESH, INDIA.

2010-2012

ACKNOWLEDGEMENT

I express my sincere gratitude to management of

BHARAT HEAVY ELECTRICALS LIMITED

for allowing me to

conduct the study in their organization.

My sincere thanks to sir P.V.ARUN KUMAR, Finance
Manager , BHEL, RAMACHANDRAPURAM for his guidance and
suggestions in completion of this project.
Finally, I would like to convey my special regards to my
parents and all my friends who helped me in carrying out this task.

P.MAHESH
(1409-10-672-050)

DECLARATION

I hereby declare that the project report entitled

FINANCIAL

STATEMENT

ANALYSIS

OF

BHARAT

HEAVY

ELECTRICALS LIMITED has been prepared by me during the year 20102012 in partial fulfilment of the degree of MASTER OF BUSINESS
ADMINISTRATION, OSMANIA UNIVERSITY.
I also declare that the project work is the result of my own
efforts and it hasnt been submitted to any other university for the award of any
degree or diploma.

P.MAHESH
(1409-10-672-050)
PLACE:
DATE:

CONTENTS

CHAPTER 1
INTRODUCTION
OBJECTIVE OF THE STUDY
NEED AND IMPORTANCE OF STUDY
SOURCE OF THE DATA
METHODOLOGY
SCOPE OF THE STUDY
LIMITATIONS OF THE STUDY
CHAPTER 2
COMPANY PROFILE
CHAPTER 3
THEORETICAL FRAMEWORK OF
FINANCIAL STATEMENT ANALYSIS
CHAPTER 4
DATA ANALYSIS AND INTERPRETATION
CHAPTER 5
FINDINGS
CONCLUSION AND SUGGESTIONS
BIBILOGRAPHY

INTRODUCTION

Analysis means establishing a meaningful relationship between

various items of the two financial statements with each other in such a way that
a conclusion is being drawn. By financial statements by means of two
statements
Profit and loss account or Income Statement
Balance Sheet or Position Statement
These are prepared at the end of a given period of time. They are
the indicators of profitability and financial soundness of the business concern.
The term financial analysis is also known as analysis and interpretation of
financial statements. It refers to the establishing meaningful relationship
between various items of the two financial statements i.e. Income statement and
Position statement. It determines financial strength and weakness of the firm.
Analysis of financial statements is an attempt to assess the efficiency and
performance of an enterprise. Thus, the analysis and interpretation of financial
statements is very essential to measure the efficiency, profitability , financial
soundness and future prospects of the business units. Financial analysis serves
the following purposes.
Measuring the Profitability
The main objective of a business is to earn a satisfactory return on
the funds invested in it. Financial analysis helps in ascertaining whether
adequate profits are being earned on the capital invested in the business or not.
It also helps in knowing the capacity to pay the interest.

Indicating the trend of achievements

Financial statements of the previous years can be compared and

the trend regarding various expenses, purchases, sales, gross profits and net
profit etc can be ascertained. Value of assets and liabilities can be compared and
the future prospects of the business can be envisaged.
Assessing the growth potential of the business
The trend and other analysis of the business provides information
indicating the growth potential of the business.
Comparative position in relation to other firms
The purpose of financial statements analysis is to help the
management to make a comparative study of the profitability of various firms,
engaged in similar businesses. Such comparison also helps the management to
study the position of their firm in respect of sales expenses, profitability and
utilising capital, etc.
Assess overall financial strength
The purpose of financial analysis is to assess the financial
strength of the business. Analysis also helps in taking decisions, whether funds
required for the purchase of the new machines and equipments are provided
from internal sources of the business or not if yes, how much? And also to
assess how much funds have been received from external sources.

Objectives of the study

 To calculate the important financial ratio of the organisation as

a part of the ratio analysis thereby to understand the changes
the needs and trends in the firms financial position.
To assess the performance of B.H.E.L on the basis of earnings
and also to evaluate the solvency position of the company.
To identify the financial strengths and weaknesses of the
organization.
To give the appropriate suggestions to the investors. To help
them to make more informed decisions.

Need and importance of study

Financial performance of an enterprise will affect other types of
performance and also the productivity of finances is good, the productivity of
men and material would be good.
Moreover the study of non-economic and qualitative performance, which
studies the non economic factors like customer satisfaction, citizen satisfaction
etc.

Source of data
The data is collected from the following sources.

 Three year annual report of BHEL from 2007-2010

Interaction with the related finance department.

METHODOLOGY
The study carried with the cooperation of the management who
permitted to carry on the study and provided the requisite data collected from
the following sources.
Primary data
Secondary data
PRIMARY DATA
The information collected directly without any reference is primary
data. In the study it is mainly through conversation with concerned officers or
staff members either individually or collectively. The data includes:
1. Conducting personal interview with the officers of the company.
2. Individual observation and inferences.
3. From the people who are directly involved with the transaction of
the firm.

Secondary data

Study has been taken from secondary sources i.e. published annual
reports of the company editing, classifying and tabulation of the financial data.
For this purpose performance data of BHEL for the years 2007-2008 to 20092010 has been used.

Scope of study
The scope and period of the study is being restricted to the following.
1. The scope is limited to the operations of the BHEL.
2. The information is obtained from the primary and secondary data was
limited to the BHEL.
3. The profit and loss, the balance sheet was on the last six years.
4. Comparison analysis was done by comparison of sister units.

Limitations of study
1. The study is confined to a period of last 4 years.
2. As most of the data is from the secondary sources, hence the accuracy is
limited.

COMPANY PROFILE

BHARAT HEAVY ELECTRICALS LIMITED

The vital role played by the BHEL today in the country is the mark of
it continuous efforts to improve the service in the nation by consultancy,
manufacturing and offering services in power sector.

This success story of BHEL however goes back to 1956 when its first
plant was set up in BHOPAL. Three more major plants followed in
HARIDWAR, HYDERABAD and THIRUCHIRAPALLI flowed this. These
plants have been the core of BHELS efforts to grow and diversify and become
one of the most integrated power and industrial equipment manufacturers in the
world. The company now has 14 manufacturing units,8 service centres and 4
power sector regional centres, besides project sites spread all over India and
abroad.

BHEL manufactures over 180 products under 30 major product groups

and meets the needs of core sector like power, industry, transmission, defence,
telecommunications, oil business etc. Its products have established an enviable
reputation for high quality and reliability. This is due to the emphasis placed all
along on design, engineering and manufacturing to international standards by
acquiring and adopting some of the best technologies developed in its own
R&D centres. BHEL has acquired ISO 9000 certification for environments.
BHEL caters to the needs of different sectors by designing and manufacturing
according to the need of its client in power sector.

COMPANY VISION,MISSION and OBJECTIVE

 VISION:
A world class, innovation, competitive and profitable
engineering enterprise providing total business solutions.
MISSION:
To be the leading engineering enterprise providing quality
products system and services in the field of energy, transportation,
industry, infrastructure and other potential areas.
VALUES:
1. Meeting commitments made to external and internal
customers.
2. Faster learning, creativity and speed of response.
3. Respect for dignity and potential of individuals.
4. Loyalty and pride of the company.
5. Team playing.
6. Zeal to excel.
7. Integrity and fairness in all matters.

OBJECTIVES

GROWTH:
To ensure a steady growth by enhancing the competitive edge of
BHEL in exiting business, new areas and international operation so as to fulfil
national expectations from BHEL.
PROFITABILITY:
To provide a reasonable and adequate return on capital employed,
primarily through improvements in operational efficiency, capacity utilization
and productivity and generate adequate internal resources to finance the
company growth. Confidence in providing increased value for this money
through international standards of product, quality, performance and superior
customer services.

TECHNOLOGY:
To achieve technology excellence in operations by development of
indigenous technologies to and efficient absorption and adaptation of imported
technologies to suit business needs and priorities and provide a competitive
advantage of the company.
IMAGE:
To fulfil the expectation which stock holders like government as
own employees, customers and the country at large have from BHEL.

SWOT ANALYSIS OF BHEL

The strength, weakness, opportunities and threats which are being experienced
by BHEL as a growing concern have been summarized up in the following
lines.

STRENGTHS
1. Vast pool of trained man power.
2. Excellent state of art facilities.
3. Good working atmosphere
4. Rapport between management and union.
5. Product manufactured international quality
6. Low labour cost and low manufacturing cost.
WEAKNESS
1. Excess man power
2. Slippage in delivery commitments
3. System implementation adequate
4. No financial package
5. Inadequate compensation package to employees.

OPPORTUNITIES

1. Growing power sector machinery

2. Liberalization has opened up the market
3. Navratna company status
4. Dominant player in domestic market.
THREATS
1. Liberalizationentry of MNCS or private sector-more competition.
2. MNCS taking away good employees with attractive packages.
3. Government taxation policy-against manufacturing sector.
4. Poor infrastructure.

PRODUCTS OF BHEL

BHEL manufactures a wide range of power plant equipments and also caters
to the industry sector.
1. Gas turbines
2. Steam turbines
3. Compressors
4. Turbo generators.
5. Pumps
6. Pulverizes
7. Switchgears
8. Oil rigs
9. Electrics for urban transportation system
10.Telecommunication.

THEORITICAL
FRAMEWORK
FINANCIAL
ANALYSIS

INTRODUCTION TO FINANCE:

OF
STATEMENT

Financial statement is that managerial activity which is

concerned with the planning and controlling of the firm financial resources.
Though it was a branch of economic till 1890 as a separate activity or discipline
it is of recent origin. Still, as no unique body knowledge of its own, and draws
heavily on economics for its theoretical concepts even today.
The subject of financial management is of immense interest both
academicians and practising manager. It is of great interest to academicians
because the subject is still developing. And there are still certain areas where
controversies exist for which no unanimous solutions have been reached as yet.
Practicing manager are interested in this subject because among the most
crucial decision of the firm are those which relate to

finance and an

understanding of the theory of financial management provides them with

conceptual and analytical insight to make those decision skilfully.
SCOPE:
Firms create manufacturing capacities for production of good, some
provide services to customers. They sell their goods or services to earn profit.
They fund to acquire manufacturing and other facilities. Thus the three most
important activities of a business firm are:
PRODUCTION
MARKETING
FINANCE

FUNCTION:
The finance function form production, marketing and other
functions. Yet the function themselves can be readily identified. The function of
raising funds, inverting them in assets and distributing returns earned from
assets to shareholder respectively. The finance functions are:
Investment or long term asset mix decision
Financing or capital mix decision
Dividend or profit allocation decision
Liquidity or short term asset mix decision.
OBJECTIVES OF THE STUDY:
1. To calculate the important financial ratio of the organization as a part of
the ratio analysis thereby to understand the change and treads in the firm
financial position.
2. To access the performance of the BHEL on the basis of earnings and also
to evaluate the solvency position of the company.
3. To identify the financial strengths and weaknesses of the organization.
4. To give appropriate suggestion to the investors. To help them to make
over,
5. Informed decision.

SCOPE OF THE STUDY:

The scope and period of the study is restricted to the following.
1. The scope is limited to the operation in the BHEL.
2. The information obtained from the primary and secondary data was
limited to the BHEL
3. The key information performance indicated is taken from 2007-2010.
4. The profit and loss, the balance sheet was on the last 3 years.
5. Comparison analysis was done in comparison of the sister units.
LIMITATIONS OF STUDY:
1. The study is confined to a period of last 3 years.
2. As most of the data is from secondary sources, hence the accuracy is
limited.
METHODOLOGY:
The study basically depends on:
1. PRIMARY DATA
2. SECONDARY DATA
PRIMARY DATA COLLECTION:
The information collected directly without any reference is primary data. In
the study it is mainly through conservation without concerned officers or staff
member either individually or collectively. The data includes.
1. Conducting personal interview with officers of the company.

2. Individual observation and inferences.

3. From the people who are directly involved with the transaction of the
firm.

SECONDARY DATA COLLECTION

Study has been taken from secondary sources i.e. published annual
report of the company. Editing. Classifying

and tabulation of the

financial data for this purpose performance data of

BHEL or the

yeary2007-2008 to 2009-2010 have been used.

INDEPTH ANALYSIS OF FINANCIAL ANALYSIS:
(A)DEFINITIONS:
The term financial analysis is also known as analysis
and interpretation of financial statements. It refers to the process of
determining financial strengths and weaknesses of the firm by establishing
strategic relationships between the items of the balance sheet, profit and loss
account and other operative data.
ACCORDING TO Mr. HARRY GUTTMANN:
The first and most important functions of financial statements
are of course to those who control and direct the business to the end of security
the profits and maintaining sound financial conditions.
(B)NATURE OF FINANCIAL STATEMENTS:
The term financial statements refers to the balance sheet
reflection the financial position of the assets, liabilities a capital of a particular
company during a certain period and profit and loss account showing the

operational results of the company during a certain period. Financial statements

are plain statements of informed opinion uncompromising in their truthfulness.
It is meant that with in the limits of accepted accounting principles and the very
human abilities of the persons preparing them they have to rely on judgements
and estimated divorced of prejudice.
(C)CONVENTIONS:
According to the American institute of certified public
accounts, financial statements reflect , a combination of recorded facts
accounts conventions and personal judgements and the judgements and the
conventions applied affect them materially, this implies that the exhibited in
the financial statements are affected by recorded facts, accounting conventions
personal judgements.
(D) USES AND IMPORTANCE OF FINANCIAL STATEMENTS:
The financial statements are mirrors which reflect the financial position and
operating strengths or weaknesses of the concern. These statements are useful
to management, investors, creditors, bankers, workers, government and public
at large. George O May points of the following measure used of financial
statements:
As a basis for taxation.
As a basis for price or rate regulation
As a guide to the value of investment already made
As a basis for granting credit.
(E)LIMITATIONS OF FINANCIAL STATEMENTS:

 Financial statements are essentially interim reports and hence

cannot be final because the actual gain or loss of a business can
be determined only efface it has put down its shutters.

They tend to give an appearance if finality and accuracy,

because they are expressed in exact money amount. Any value
to the amounts presented in the statement depends on the value
standards of the person dealing with them.

The balance sheet loses its functions as an index of current

economic realities due to the fact the financial statements are
compiled on the basis of historical costs while there is a market
decline in the value of the monitoring unit and the resultant rise
in prices. The problem has become more important especially
during the war and the post war period.
They do not give effort to many factors, which have a hearing
on financial conditions and operating results because they
cannot be stated in terms of money and are qualitative in nature.
Such factors are reputation and prestige of the business with the
public its credit rating the efficiency and loyalty of its
employees and integrity of the management.
Due to these limitations it is said that financial statements dont
show the financial conditions of the business rather they show,
the position of financial accounting for a business.
(F)PARTIES INTERESTED IN FINANCIAL STATEMENTS:
Now a days the ownership of capital of many public companies
has become truly board based due to dispersal of shareholding, hence, the public
in general evinces interest in the financial statements. Apart from the

shareholders there are other persons and bodies who are also interested in
financial results disclosed by the annual reports of the companies. As already
mentioned, such persons and bodies include:
1. Potential investors
2. Creditors, potential suppliers or other doing business with the company.
3. Debenture holders
4. Credit institutions like bankers.
5. Employee customers who wish to make along standing contact with the
company.
6. Economic and investment analysis
7. Members.
(G)ANALYSIS

AND

INTERPRETATION

OF

FINANCIAL

STATEMENTS:
Analysis and interpretation of financial statements are and attempt
to determine the significance and meaning of the financial statement data as so
that a forecast can be made of the prospects for future earnings ability to pay
interest, debt and maturities (current and long term) and profitability of a sound
dividend policy.
Financial analysis main function is pinpointing of the strengths
and weaknesses of a business concerns by regrouping and analysis of figure
contained in financial statements by making comparisons of various component
and by examine their content. The financial manager uses this as the basis to
plan future financial requirements by means of forecasting and budgeting
procedures.

The analysis of and interpretation of financial statements represents

the lost of the four measure steps of accounting viz.
Analysis of each transaction to determine the accounts to debited and
credited and the measurements and the valuation of each transactions to
determine the amounts involved.
Recording of the information in the journals. Summarization in largest
and preparation of work sheet.
Preparation of financial statements.
Analysis and interpretation of financial statements results in the
presentation of information that assets business managers, creditors and
investors. This requires a clear understanding of monitoring item of the
items.
The analysis must group that represents sound and unsound
relationships reflected by the financial statements. Those, the data is more
maintain full and it is placed in better perspective when it is provision and by
means of measurement, its relationship with others is established in terms of if
relative significance and it is ranked in terms of its relative significance. One
can achieve this by comparisons made between related items in the statements
series of years.
(H)TYPES OF FINANCIAL STATEMENTS:
Financial statements primarily comprise two basic statements:
1. The position statements of the balance sheet.
2. The income statements or the profit and loss account.

Accounting principles specify that a complete set of financial statements must

include:
1. A balance sheet
2. An income statement
3. A statement of change in owners accounts.
4. A statement of changes in financial position.
BALANCE SHEET:
The balance sheet is one of the important statements
depicting the financial strength of concern. It shows the properties that are
owned on one hand and on the other hand the sources of the assets owned by the
concern and all the liabilities and claims it owes to owners and outsiders. The
balance sheet is prepared on a particular date. The right hand shows properties
and assets and the left hand shows liabilities.
INCOME STATEMENT OR PROFIT AND LOSS ACCOUNT:
Income statement is prepared to determine the operation position of the
concern. It is a statement of revenues. The income statement may be prepared in
the form of manufacturing account to find out the cost of the production in the
form of trading accounts to determine gross profit or loss, in the form of profit
and loss account to determine net profit or net loss.
STATEMENT OF CHANGES IN OWNERS EQUITY:
The term owners equity refers in the claims of the owners of the
business against the assets of the firm. It consist of two elements.
1. Paid up share capital i.e. the initial amount of funds invested by the
shareholders.

2. Retained earnings/reserves and surplus representing undistributed profits.

The statement of changes in owners equity simply shows
the beginning balance of each owners equity account, the reasons of
increases and decreases in each, and its ending balance. However, in most
cases the owners equity account changes significantly in retain earnings
and hence the statement of changes in owners equity becomes merely a
statement of retained earnings.
STATEMENT OF CHANGES IN FINANCIAL POSITION:
The basic financial statement i.e. the balance sheet and profit and loss
account and income statement of a business reveals the net effect of various
transactions on the operational position of the company. But there are many
transactions that do not operate through profit and loss account. Those for a
better understanding another statement of changes in financial position has to be
prepared to show the changes in assets and liabilities from the end of another
point of time. The statement of changes in financial position may take any of the
two forms. They are:
Funds statements
Cash flow statements
TOOLS OF FINANCIAL ANALYSIS USED IN THE STUDY:
MEANING OF COMPARATIVE STATEMENT:
The comparative financial statements are the statements of the
financial position of different periods; the elements of financial positions are
then in a comparative form to give idea of financial position of two or more
periods. The comparative statement may show:
Absolute figures

 Changes in absolute figures i.e. increase or decrease in absolute figures.

Absolute data in terms of percentage.
Increase or decrease in terms of percentage.
COMPARATIVE BALACE SHEET:
It is a statement of financial position of a business at a specific
movement of time. It represents all assets owned by the business at a particular
movement of time and the claims of the owners and outsiders against those
assets at the time. It is a way they shape the financial condition of the business
at that time.
The important distinction between an income statement and
balance sheet is that the income statement is for a period where as balance sheet
is on a particular date.
COMPARATIVE INCOME STATEMENT:
The comparative income statement gives the results of the
operation of a business. The comparative income statement gives an idea of the
program of a business over a period of time. The changes in absolute data in
money values and percentages can be determined to analyze the profitability of
the business.
GUIDELINES FOR INTERPRETATION OF INCOME STATEMENT:
The analysis and interpretation of income statement will involve
the following steps:
1. The increase or decrease in sales should be compared with the
increase or decrease in cost of goods sold. An increase in sales will
not always mean an increase in profit. The profitability will

improve if increase in sales promotion and the control of operating

expenses.
2. The second step of analysis should be the study of operation profit.
The operating expenses such as office and administrative expenses.
Selling and distribution expenses should be deducted from gross
profit to find out operating profit which will result from the
increase in sales position and control of operating expenses.
3. The increase or decrease in net profit give an idea about overall
profitability of the concern, non-operating expenses such as interest
paid, loss from sale of assets, writing off to deferred expenses or
deducted from operational profit we get the figure of operating
profit.
4. An opinion should be formed about profitability of the concern and
it should be given at the end. This should be mentioned whether the
overall profitability is good or not.
COMMON SIZE STATEMENTS:
The common size statement, balance sheet and income statement
are shown in analytical percentages. The figures are shown as percentages of
total assets, total liabilities and total sales. The total assets are taken as of and
different assets are expressed as a percentage of the total.
1. Common size balance sheet: A statement in which balance sheet items are
expressed as the ration of each asset to total assets and the ratio of each
liability is expressed as a ratio of total liabilities is called common sized
balance sheet.
2. Common size income statement: The items in income statement can be
shown as percentage of sales to show the relation of each item to sales. A

significant relationship can be established between item of income

statement and value of the sales. The increase in sales will certainly
increase selling expenses and not administrative are financial expenses.

TREND ANALYSIS:
Trend percentages:
The method of trend percentages in useful analytical device
for the management since y substitution of percentage for large amounts, the
clarity and readability are achieved.
Trend percentages are immensely helpful in making
comparative study of the final statements for several years. The method of
calculating trend percentages involves the calculation of percentage relationship
that each item bears to the same item in the base year. The earliest year may be
taken as base year. Each item of the base year is taken as 100 and on the basis
the percentage for each of the item of each year is calculated.
Least Square Method:
This method is widely used in practised. It is a mathematical
method and with the help of a trend line fitted to the data in such a manner by
using the actual figures of the study period, we have to calculate the trend
values for these periods. Based on this value we can easily forecast the values of
the future period. The method of least square may be used either to fit a straight
line trend or a parabolic trend. The straight line is represented by the equation
Y(C)=A+B(X).
ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENT:

An attempt has been made to analyze and interpret the

financial statements of BHEL for the period of 2007-2010. These statements
were prepared on the basis of the data in the balance sheets and profit and loss
accounts of the BHEL for the above period.

RATIO ANALYSIS:
A ratio is a simple mathematical expression. It is a number
expressed in terms of another number, expressing the quantitative relationship
between the two, ratio analysis is the technique of interpretation of financial
statements with the help of various meaningful ratios. Ratios do not add to any
information that is already available, but they show the relationship between
two items in a more meaningful way.
Ratio analysis is a very important tool of financial analysis.
It is the process of establishing a significant relationship between the items of
financial statements to provide a meaningful understanding of the performance
and financial position of the firm. They help us to draw certain conclusions.
Comparison with related facts is the basis of ratio analysis. Ratios may be used
for comparison in any of the following ways.
1. Comparison of a firm with its own performance in the past.
2. Comparison of one firm with its own performance in the past.
3. Comparison of one firm with another firm in the industry.
4. Comparison of one firm with the industry as a whole.
5. Comparison of an achieved performance with pre-determined standards.
6. Comparison of one department of a concern with other departments.

TYPES OF RATIOS
Liquidity ratio
Capital structure/leverage ratio
Profitability ratio
Activity ratio.
LIQUIDITY RATIOS: it measures the short-term solvency of the
firm. In a short period of a firm should be able to meet all its shortterm obligation i.e. current liabilities and provisions. It is current
assets that yield funds in the short period. Current assets are those,
which the firm can convert it into cash within one year or short
run. Current assets should not only yield sufficient funds to meet
current liabilities as they fall due but also to enable the firm to
carry on its day-to-day activities.
The following are the important liquidity ratios:
1. Current ratio
2. Acid test/quick ratio.
3. Cash ratio
4. Net working capital ratio
1.Current ratio: Current ratio is the ratio of current assets to current liabilities.
Current assets are the assets that are expected to be realized in cash or sold or
consumed during the normal operating cycle of the business or with in one year,

which ever is longer, they include cash in hand and bank, bills receivable, net
sundry debtors, stock of raw materials, finished goods and working in progress,
prepaid expenses, outstanding incomes, assured incomes and short term or
temporary investments. Current liabilities are the liabilities that are to be repaid
within a period of one year. They include bills payable, sundry creditors, bank
overdrafts, outstanding expenses, income receivable in advance, proposed
dividend, provision for taxation, unclaimed dividends and short term loans and
advanced repayable within one year. Any instalment of long-term liability
payable within the next 12 months is also current liability.

CURRENT RATIO= CURRENT ASSETS/ CURRENT LIABILITIES

Generally 2 : 1 ratio is considered ideal for the company.
2. ACID TEST/QUICK RATIO: the acid test ratio is the ratio between quick
current assets and current liabilities and calculated by dividing the quick assets
by current liabilities. Quick assets mean those which can be converted into cash
immediately by exclusion of inventory and prepaid expenses from current
assets.
Acid test Ratio=Quick assets/Current liabilities.
Generally 1: 1 ratio is considered to be ideal for the company.
3. CASH RATIO: The cash ratio is the ratio of cash and bank balance, it is
calculated dividing cash and bank balance by current liabilities.
CASH RATIO= Cash and Bank balances/Current liabilities.
Generally 1 : 2 ratio is considered to be ideal for a company.
4. NET WORKING CAPITAL RATIO:

Working capital ratio refers to

comparing current assets to current liabilities and serve as the liquidity reserve

avail. To satisfy contingencies and uncertainties. It is calculated by dividing net

working capital by capital employed.
Net Working Capital Ratio = net working capital/capital employed.
Generally higher ratio is considered ideal for a company.
CAPITAL STRUCTURE/LEVERAGE RATIO: These ratios indicate the
relative interests of owners and creditors in a business by showing long
term financial solvency and measure the enterprises ability to pay the
interest regularly and to repay the principal on maturity or in predetermined instalments at due dates.
The significant leverage ratios are:
1. Debt Equity Ratio
2. Proprietary Ratio
3. Capital Gearing Ratio.
4. Fixed assets Ratio
5. Interest coverage Ratio
6. Dividend Coverage Ratio
7. Debt Service coverage Ratio.
1.Debt Equity Ratio : It reflects the relative claim of creditors and shareholders
against the assets of the business. Debt usually refers to long-term liability.
Equity includes equity and preference share capital and reserves.
Debt Equity Ratio=long term liabilities/share holders funds.
Ideal debt equity ratio is 2 : 1

2.Propreitary ratio: It expresses the relationship between the net worth and total
assets. A high proprietary ratio is indicative of strong financial position of
business.
Proprietary ratio = Net worth/ Total Assets
Net worth = Equity share capital + fictitious Assets
Total assets= fixed assets + Current Assets
Generally higher the ratio the ideal it is.
3. Capital Gearing Ratio: A company is said to be highly geared if it has a high
capital gearing ratio and lowly geared if the capital gearing ratio is low. The
extent of gearing determined the future financial structure of the business. A
company that is highly geared will have to raise funds by issuing fresh equity
shares, whereas a lowly geared company would find it attractive to raise funds
by way of term loans and debentures.
Capital Gearing Ratio = funds bearing fixed interest and fixed dividend/equity
.

share holders funds

Funds bearing fixed interest and capital=Debentures + term loans +preference .

.

share capital.

Equity share holder funds=Equity share capital +reserves-fictitious funds.

4.Fixed Assets Ratio: This ratio indicates the mode of financial the fixed assets.
It is calculated as
Fixed assets Ratio= Fixed assets/capital employed
Capital employed= equity share capital + preference share capital +reserves +
long term Liabilities Fictitious Assets.
Generally a ratio of 0.67 : 1 is considered ideal for a company.

5.Interest Coverage Ratio: This ratio is called as debt service ratio. This ratio
indicates whether a business is earning sufficient profits to pay the interest
charges. It is calculated as
Interest coverage ratio=PBIT/Fixed interest charges
PBIT=Profit before interest and taxes=PAT + Interest + Tax
Generally a ratio of around 6 is normally considered as ideal for a company.
6.Dividend coverage ratio: It indicates the ability of a business to pay and
maintain the fixed preference dividend to preference shareholders.
Dividend coverage ratio=PAT/Fixed preference dividend.
PAT= Profit After Taxes
7.Debt service coverage Ratio: It indicates whether the business is earning
sufficient profits to pay not only the interest charges, but also the instalments
due to the principal amount. It is calculated as
Debt service Coverage Ratio =(PBIT/Interest + Periodic Loan Installation)/(1Rate of income Tax)
Generally greater the ratio, the better is the servicing ability of company.
PROFITABILITY RATIO: Profitability ratios measure the profitability of
a company. Generally they are calculated either in relation to sales or in
relation to investments. The various profitability ratios are discussed
under the following heads.
(A) GENERAL PROFITABILITY RATIOS:
1.Gross Profit Ratio: Gross profit is one of the most commonly used ratios. It
reveals the result of trading operations of the business. In other words, it
indicates to us the profitability of the business. It is calculated as

Gross Profit Ratio=(Gross Profit/Net sales)*100

Gross Profit=net sales-cost of goods sold.
Net Sales=Total Sales- Sales Returns
Cost of Goods Sold=Opening Stock + Purchases + Manufacturing expensesclosing Stock.
Generally the higher the ratio, the better will be the performance of the
company.
2.NET PROFIT RATIO: It indicates the results of overall operations of the firm.
While the gross profit ratio indicates the extent of profitability of core
operations. Net profit ratio tells us about overall profitability. It is called as
Net Profit Ratio=(Net Profit after Tax/Net Sales)*100
Generally higher the ratio, the more profitable to the company.
3.OPERATING RATIO: It expresses the relationship between expenses incurred
for running the business, and the resultant net sales. It is calculated as
Operating Ratio=cost of goods sold + Office and Administrative expenses +
selling and distribution Expenses.
Generally lower the ratio, the better it is to the company.
4.OPERATING PROFIT RATIO: It establishes the relationship between
operating profit and sales. It is calculated as
Operating Profit Ratio=(Operating Profit/Net Sales)*100
Generally higher the ratio, the better it is to the company.
5.EXPENSES RATIO: Expenses ratios are the ratios that supplement the
information given by the operating ratio. Each of the expense rations highlights

the relationship given by the particular expense and net sales. For example,
factory expenses ratio is of factory expenses to net sales any expenditure can be
shown as a ratio to sales. All such ratios fall under the broad head of expenses
ratios.

(B) OVERALL PROFITABILITY RATIOS:

1.RETURN ON CAPITAL EMPLOYED RATIO(ROCE) OR RETURN ON
INVESTMENT RATIO(ROD):
This ratio reveals the earning capacity of the capital employed in
the business. In other words, capital employed is permanent capital invested in
the business. It is also called capital and hence, the ratio is also known as return
on invested capital
ROCE= (Profit before interest and taxes/capital employed) *100
2. RETURN ON NET WORTH(RONW): It indicates the return, which the
shareholders are earning on their resources invested in the business. It is
calculated as
RONW=(Profit after Tax/Net Worth)*100
Generally higher the ratio, the better it is to the shareholders.
3.RETURN ON EQUITY CAPITAL: It expresses the return earned by the
owners of the business, after adjusting for debt and preference capital. It is
calculated as
RETURN ON EQUITY= PAT- Preference dividend/equity shareholders funds.
Generally higher the ratio, the better it is to the company.

4.RETURN ON ASSETS RATIO(ROA): Return on assets reflects the return

earned by the firm for the company for the shareholders of the business on the
investment of all the financial resources committed to the business. It is
calculated as
ROA=PAT/TOTAL SALES
Generally higher the ratio, the better it is to the shareholders.
5.EARNINGS PER SHARE(EPS): It is the earning accruing to the equity
shareholders on every share held by them. It is calculated as
EPS= PAT-Preference dividend/number of equity shares.
Generally the ratio, the better is the performance of the company.
6.Dividends per share (DPS): It is the amount of dividend payable to the holder
of one equity share. It is calculated as
DPS=Dividend on equity share capital/number of equity shares
Generally from investors point of view, the higher the ratio, the happier the
investor.
7.DIVIDEND PAY OUT RATIO: It is the ratio of dividend per share to earning
per share. It is calculated as
Dividend Pay Out Ratio=DPS/EPS
8.PRICE EARNING RATIO(P/E Ratio): It expresses the relationship between
market price of one share of a company and earnings per share of that company.
P/E Ratio=Market Price of Equity share/EPS
There is no ideal P/E ratio.

9.DIVIDEND YIELD RATIO: It expresses the relationship between dividend

earned per share and the market price per share. In other words, it expresses the
return on investment by purchasing a share in the stock market , without
accounting for any capital appreciation. It is calculated as
DIVIDEND YIELD RATIO- Dividend per share/Market price of share.
10.BOK VALUE: It is the fraction of the net worth of the business as depicted
in the balance sheet, which is attributable to one equity share of the business . it
is calculated as
BOOK VALUE=Equity share holders funds/number of equity shares.
Generally higher the book value of the share, the more strong the business is
assumed to be.
ACTIVITY RATIO: Activity ratios measures the efficiency or
effectiveness with which a firm managers its resources or assets. They
calculate the speed with which various assets, in which funds are blocked
up, get converted into sales. The significant activity or turnover ratios are
1.INVENTORY TURN OVER RATIO OR STOCK TURN OVER RATIO:
Stock turnover ratio indicates the number of items the stock has turned over into
sales in a year. It indicates to us the extent of stock required to be held in order
to achieve a desired level of sales.
Inventory Turn Over Ratio = Cost of Goods Sold/Average Stock
Cost of Goods Sold=Sales-Gross Profit.
Average Stock=(Opening Stock + Closing Stock)/2
Generally 8 is considered ideal ratio of the company.

2.DEBTORS TURN OVER RATIO: Debtors Turn Over Ratio expresses the
relationship between debtors and net credit sales. It is calculated as
Debtors Turn Over ratio= Net Credit Sales/Average Debtors.
Generally the ratio between 10-12 an ideal value for the company.
3.CREDITORS TURN OVER RATIO: Creditors turn over ratio expresses the
relationship between creditors and net credit purchases. It is calculated as
Creditors Turn Over Ratio= Net Credit Purchases/Average Creditors.
Generally the ratio 12 is an ideal for the company.
4.WORKING CAPITAL TURN OVER RATIO: This ratio is defined as
Working Capital Turn Over Ratio= Cost of Goods Sold/Working Capital
Working Capital=Current Assets- Current Liabilities.
Generally higher ratio indicates efficient utilization of firms funds.
5.Fixed Assets Turn Over Ratio: It is Defined as ratio of Net Sales to the Fixed
Assets.
Generally the ratio of around 5 is considered ideal for the company.
6.TOTAL ASSETS TURN OVER RATIO: It is defined as ratio of Net Sales to
the Total Sales.
Generally higher the ratio, the greater is the ability of the firm to utilize the
investments in the business.

DATA ANALYSIS
AND
INTERPRETATION

Current Asset Liability Ratio

year
current assets
current liability Ratios
2001-02
155792
73129
2.13
2002-03
166669
74427
2.23
2003-04
155652
84990
1.83
2004-05
192697
116644
1.65
2005-06
235062
143200
1.64
2006-07
276062
208869
1.32
2007-08
310002
243220
1.27
2008-09
453597
376332
1.2
2009-10
580804
397574
1.46
2010-11
771519
502024
1.54

Interpretation The ideal ratio for the concern is 2:1 i.e. current assets doubled
for the current liabilities considered to be satisfactory. The current ratio of
BHEL is less than ! .Thus it has to maintain its efficient current assets.

Acid Test Ratio

Year
Liquid assets
Liquid liabilities Ratio
2001-02
898
73129
2002-03
1281
74427
2003-04
472
84990

0.012
0.017
0.005

2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11

2094
4643
12
14
15
1475
1415

116644
143200
208869
243220
376332
397574
502024

0.018
0.032
0.00005
0.00003
0.00003986
0.00371
0.002818

Acid Test Ratio Current Assets Inventory / Current Liabilities

The ideal quick ratio is 1:1 which is considered satisfactory for the concern. The
company is maintaining the ratio above the standard norm , thus the
management of BHEL is label to meet its current obligations.

Net working capital

Net working
year
2001-02

capital

Capital

employed
Ratios
82663
90522 0.9131

2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11

92242
70662
76053
91862
67193
96410
77265
183230
269495

99337
79114
85026
102462
79459
107986
96894
207051
305907

0.93
0.8931
0.894
0.89
0.84
0.89
0.797
0.884
0.881

NET WORKING CAPITAL = NET WORKING CAPITAL / CAPITAL

EMPLOYED
A higher networking capital ratio indicates efficient utilization of working
capital . Therefore the company should concentrate more on working capital
management

Debt equity ratio

year
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08

Total debt

Equity
497
573
386
513
1053
607
587

3252
3252
3252
3252
3252
3252
3252

Ratios
0.15
0.17
0.11
0.15
0.32
0.18
0.18

2008-09
2009-10
2010-11

2566
2034
2265

3252
3252
3252

0.789
0.62
0.70

Debt Equity Ratio :

The debt equity ratio has been increasing over the years and it has been
maintained at a level of .62 for the financial year 2009-10

Fixed assets ratio

Capital
year
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11

Fixed Assets
employed
Ratios
7859
90522
0.07
7095
99337
0.08
8360
79114
0.07
8896
85026
0.1
10600
102462
0.1
12347
79459
0.15
9909
107986
0.09
17699
96894
0.18
22595
207051
0.11
31830
305907
0.10

Fixed Assets Ratio = Fixed Assets / Capital Employed

Generally financially well managed company will have its fixed assets financed
by long term funds. There fore , the fixed assets ratio should never be more than
!.A ratio of .67 is considered ideal. The results for BHEL is much less at 0.11

Interest coverage ratio

year
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11

PBIT

Interest
13500
13420
15821
33122
60867
63290
68916
68478
86438
130330

3054
258
48
1105
682
2300
5870
6826
7101
8583

Ratios
4.42
52.01
329.6
29.97
89.24
27.51
11.74
10.03
12.17
15.18

Interest Coverage Ratio.= PBIT/INTREST

Interest coverage ration of BHEL is not constant , from 2008-09 the ratio is10
as in 2009 -10 the ratio is 12.17, There is a random fluctuation in the ratio

Gross profit
year
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11

Gross profit
Net sales
Ratios
13500
153205
0.088
13420
137838
0.097
15821
174490
0.07
33122
174668
0.189
60867
267217
0.227
63290
289241
0.218
68916
310235 0.2224
68478
414816
0.165
86483
500342
0.172
130330
665323
0.196

Gross Profit = Gross /net sales

Generally the higher gross profit ratio , the better for the performance of the
concern .In BHEL , the company has started to increase from the year on year
which is a very good sign for the company.
Operating ratio
year
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11

Operating cost Net sales

Ratios
131006
153205
0.85
116708
137838
0.84
149823
174490
0.85
136630
174668
0.78
201962
267217
0.75
221227
289491
0.76
234677
310235
0.76
338382
414816
0.81
404647
500342
0.8
524531
665323
0.79

Operating Ratio : Operating Cost / Net Sales

Generally the lower the Operating Cost , the better for the concern. The ratio
should be below1 which is satisfactory for the concern.

Return on capital employed

Capital
year
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11

PBIT
13500
13420
15821
33122
60867
63290
68916
68478
86438
130330

employed
Ratios
90522
0.149
99337
0.135
79114
0.199
85026
0.389
102462
0.594
79459
0.796
107986
0.638
96894
0.706
207051
0.417
305907
0.426

Return on Capital Employed = PBIT/Capital Employed

The higher the ROCE ratio , the better for the concern. The company has been
keeping up the good performance is increasing at the rapid phase which in turn
is a good sign for the company.

Debtors turnover ratio

Average
year
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11

Net credit sales debtors

Ratios
153205
85001
1.8
137838
81237
1.69
174490
82829
2.1
174668
112238
1.55
267217
135322
1.97
289491
177301
1.63
310235
215291
1.44
414816
287414
1.44
500342
328201
1.53
665323
537364
1.24

Debtors Turnover Ratio = Net Credit Sales / Average Debtors

The BHEL`s debtor turnover ratio was below 2 .Its has bee increasing since
2008-09 from 1.44 to 1.53 in 2009-10, the increasing trend Implies the efficient
management of Debtor and credit sales.

Creditors turnover ratio

Net credit
year
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11

Average

purchases
creditors
Ratios
12060
29738
0.4
16646
27610
0.6
16350
20467
0.79
16727
24225
0.81
19656
39495
0.49
21772
46452
0.48
25459
54586 0.4664
31900
58078 0.54926
60293
88228
0.68
65700
103305
0.64

Creditors Turnover Ratio : Net Credit Purchases /Average Creditors

Interpretation : The BHEL`s creditors Turn Over Ratio is at 0.68 , it has been on
the increasing trend since past two financial years. The management should try
to reduce this by adopting proper payment policies.

Fixed asset turnover ratio

year
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11

Net sales
Fixed assets
Ratios
153205
7859
19.49
137838
7095
19.42
174490
8360
20.87
174668
8896
19.63
267217
10600
25.2
289491
12247
23.63
310235
9909
31.3
414816
17699
23.43
500342
22595
22.14
665323
31830
20.90

Fixed Assets Turnover Ratio. = Net Sales / Fixed Assets

At high fixed assets turnover ratio indicates better utilization of the firms fixed
assets. A ratio around 5 is considered ideal for the concern .In BHEL it is more
than 22.This is a very good sigh for the company.

Total asset turnover ratio

year
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11

Total debt

Equity
497
573
386
513
1054
607
587
2566
2034
2265

3252
3252
3252
3252
3252
3252
3252
3252
3252
3252

Ratios
0.15
0.17
0.11
0.15
0.32
0.18
0.18
0.78
0.62
0.70

Total Assets Turnover Ratio : Net Sales / Total Assets

The Total Assets turnover ratio of the BHEL is below 1 . This shows greater
ability of the firm to utilize the investment in the business

Comparative income statement 2009-2010 and 2010-11

DESCRIPTION
2009-10
TURNOVER- BHEL
- NON-BHEL
TOTAL TURNOVER
CHANGES IN WIP
CHANGES IN FG
EXPORT INCENTIVES
GROSS TURNOVER
EXCISE DUTY
GTO LESS ED
DIRECT MATERIALS
SUB-CONTRACT
PAYMENT
POWER AND FUEL
TRANSFER IN

2010-11 increase/decrease increase/decrease

1106
499236
500342
49447
-9622
690
540857
16859
523998
340315

400
664923
665323
-25439

1356

1682

1746
806

669
640553
33288
607265
342167

-706
165687
164981
-74886
-9622
-422
99696
16429
83267
1852

378
1693 -53
681 -125

-63.83%
33.19%
32.97%
-151.45%
-21.00%
18.43%
97.44%
15.89%
0.544%
24.04%
-3.04%
-15.51%

SERVICE
TOTAL OF `C'
VALUE ADDED
PERSONNEL
PAYMENTS
INDIRECT MATERIALS
OTHER EXPENSES
-BHEL
OTHER EXPENSES NON BHEL
PROVISIONS
PROV.EXCH.VAR.
LESS:MISC.INCOME
TOTAL OF `E'
GROSS MARGIN

344223
179775
62236

346223 2000
261042 81267
69941

3902

7795
5861 2059

7101

8583

26301

27410

20.87%

1109

4.22%
%
%
102.71%
41.49%

38565
-1523
23356 11834
125481 36795

91089

135561

4606

5231

86483
-7101
93584
523998

130330
-2905
133235
607265

OPERATING COST

404647

524531

12.38%
52.76%

1482

-226
894
11522
88686

(PBIDT)
DEPRECIATION
DRE ON VRS
GROSS PROFIT (PBIT)
INTEREST
PROFIT BEFORE TAX
GTO LESS ED

0.58%
42.20%

44472
625
0
43847
-10006
39651
83267
0
119884

48.82%
13.57%
50.70%
-140.91%
42.37%
15.90%

Comparative income statement 2008-09 & 2009-10

DESCRIPTION
200809
TURNOVER- BHEL
- NON-BHEL
TOTAL TURNOVER
CHANGES IN WIP
CHANGES IN FG
EXPORT INCENTIVES
GROSS TURNOVER
EXCISE DUTY
GTO LESS ED
DIRECT MATERIALS
SUB-CONTRACT
PAYMENT
POWER AND FUEL
TRANSFER IN SERVICE
TOTAL OF `C'
VALUE ADDED
PERSONNEL PAYMENTS
INDIRECT MATERIALS
OTHER EXPENSES -BHEL
OTHER EXPENSES - NON
BHEL
PROVISIONS
PROV.EXCH.VAR.
LESS:MISC.INCOME
TOTAL OF `E'
GROSS MARGIN (PBIDT)
DEPRECIATION
DRE ON VRS
GROSS PROFIT (PBIT)

200910 Increase/Decrease Increase/Decrease%

779
414037
414816
10637
4938
1112
431503
24537
406966
259592

1106
499236
500342
49447
-9622
690
540857
16859
523998
340315

978

1356

-422
109354
-7678
117032
86723

41.98%
20.58%
20.62%
364.86%
%
-37.95%
25.34%
-31.29%
28.76%
33.41%

378
-169
-541
80381
36651
3871
-658
665

38.65%
-8.78%
-40.16%
30.46%
25.61%
6.63%
-14.43%
10.33%

10899

70.76%

-2391
18018
18633
628
0
86483 18005

-17.18%
25.50%
25.72%
15.79%

1925
1746
1347
806
263842 344223
143124 179775
58365 62236
4560
3902
6436
7101
15402

26301

142
-324
13913
70668
72456
3978

-226
894
11522
88686
91089
4606

68478

327
85199
85526
38810

26.29%

INTEREST
PROFIT BEFORE TAX
GTO LESS ED
OPERATING COST

-6826 -7101
75304 93584 18280
406966 523998 117032
0
338382 404647 66265

24.27%
28.76%

Comparative income statement 2007-2008 and 2008-09

comparative income statement
DESCRIPTION
200708
TURNOVER- BHEL
- NON-BHEL
TOTAL TURNOVER
CHANGES IN WIP
CHANGES IN FG
EXPORT INCENTIVES

667
309568
310235
17781
4591
2283

2008-09
779
414037
414816
10637
4938
1112

Increase /

Increase /

Decrease

decrease %

112
104469
104581
-7108
347
-1171

16.79%
33.74%
33.71%
-39.97%
7.56%
-51.29%

GROSS TURNOVER
EXCISE DUTY
GTO LESS ED
DIRECT MATERIALS
SUB-CONTRACT PAYMENT
POWER AND FUEL
TRANSFER IN SERVICE
TOTAL OF `C'
VALUE ADDED
PERSONNEL PAYMENTS
INDIRECT MATERIALS
OTHER EXPENSES -BHEL
OTHER EXPENSES - NON

334890
27236
307654
183845
790
1840
1394
187869
119785
36001
4039
6125

431503
24537
406966
259592
978
1925
1347
263842
143124
58365
4560
6436

12848

15402

BHEL
PROVISIONS
PROV.EXCH.VAR.
LESS:MISC.INCOME
TOTAL OF `E'
GROSS MARGIN (PBIDT)
DEPRECIATION
DRE ON VRS
GROSS PROFIT (PBIT)
INTEREST
PROFIT BEFORE TAX
GTO LESS ED

68916
-5870
74786
307654

OPERATING COST

234677

1805
-1524
11746
47548
72237
3321

96613
-2699
99312
75747
188
85
-47
75973
23339
22364
521
311

2554
142 -1663
-324
13913 2227
70668 23120
72456 219
3978 657
0
68478 -438
-6826
75304 518
406966 99312
0
338382 103705

28.85%
-9.91%
32.28%
41.20%
23.80%
4.62%
-11.93%
40.44%
19.48%
62.12%
12.90%
5.08%
19.88%
-92.13%
%
18.96%
48.63%
0.303%
19.78%
-0.64%
%
0.69%
32.28%
44.19%

FINDINGS
1. The net working capital was Rs 91021 lacs in 2000-2001. This decreased
to Rs 82663 lacs in the year 2001-2002. In the year 2006-2007 the net
working capital is Rs 67193 lacs.
2. The current ratio of BHEL was 2.41 in the year 2000-2001. There was
decrease in the ratio up to the year 2007-2008. The ratio is decreasing
year by year. But the BHEL is maintaining current ratio more than the
standard norms of 2.
3. The organization is able to maintain both current ratio and quick ratio
above the standard norms. i.e. the ideal current ratio for the concern is 2:1
and the quick ratio is 1:1 but the cash ratio is fluctuating.
4. The quick ratio of the organization is in decreasing trend year by year.
5. Investment in current assets has been increasing from Rs 155302 lacs in
2000-2001 to Rs 310002 in 2007-2008.
6. The inventory turnover ratio of BHEL is fluctuating i.e., showing
decreasing trend during the years 2000-2001 to 2003-2004. But there
onwards it has slowly increased till the financial year.

7. The debtors turnover ratio has decreased from the year 2001-2002 to
2002-2003. It was 2.10 in the year 2003-2004. There was decrease in
debtors turnover ratio till the financial year.

CONCLUSIONS AND SUGGESTIONS:

1. The current ratio of BHEL is decreasing year by year . In the year 20002001 it was 2.41 and during the year 2008-2009 it has gone down to 1.2
later in the next financial year 2009-2010 it has gone up to 1.46, so the
company should concentrate effectively on the management of Current
Assets and Current Liabilities.
2. The Net Working Capital of BHEL is good for almost in range for each
and every year. It is always in the ideal ratio for every organization.
3. The BHEL is using the moving average method in valuation of stock.
4. The debtors constitute nearly 50% of the Total Current Assets. For the
Company it is difficult to manage the accounts receivables. The company
should collect debts as quickly as possible.
5. The company has to exercise cost of control and cost of reduction
techniques to increase its profitability.
6. The debtors turn over ratio in 2005-2006 is 1.97. the ratio has increased
than previous years except for 2003-2004, which had 2.10. the decreasing

ratio shows the inefficient management. They should concentrate more on

the collection of the debts.
7. The return on investment ratio of the BHEL is 59.40 in 2005-2006. It has
increased when compared to previous years ratios. It is beneficial to
investors who are interested to know the profits earned by the company.
8. The investment in loans and advances should be minimized to possible
extent.
9. Effective internal control system should be established. So that it can
have control over all aspects of the company.

BIBILOGRAPHY:
http://www.bhel.com/financial_information/index.php
http://www.studyfinance.com/lessons/workcap
www.bizsearchpapers.com
http://www.antiessays.com/free-essays/9076.html
http://www.bhelhyderabad.com/bhel_hyderabad_unit.htm
http://en.wikipedia.org/wiki/Bharat_Heavy_Electricals_Limited
Financial Management I M Pandey.
Accounting for Managers-Jelsy Joseph Kuppapally.
Financial statement analysis - Gokul Sinha.

INTRODUCTION

INTRODUCTION
The main aim of the project is to study the capital budgeting process in the company.
In order to run the industry or company it requires machinery and other assets. To seek
machinery and other assets the company must spend or invest some money in order to buy
them. Before investing money on the machinery, the company need to evaluate the future
returns on the machinery, its depreciation value per year etc, then the company after going
through the above information, it will decide whether to invest on that particular machinery
or not. So, studying all this information comes under the title CAPITAL BUDGETING it
deals with evaluation of various projects using different capital budgeting techniques like net
present value, internal rate of return, profitability index, rate of return. From these
calculations the company will find out the feasibility of project that is whether to take up the
project or not. Then, finally the company will decide up on the project.

DEFINITION OF CAPITAL BUDGETING:

Capital Budget may be defined asthe firms decision to invest its current funds most
efficiently in the long-term assets in anticipation of an expected flow of benefits over a series
of years. Therefore it involves a current outlay or series of outlay of cash resources in return
for an anticipated flow of future benefits. The long-term assets are those, which affect the
firms operations beyond the one year period. The firms investment decisions would
generally include expansion, acquisition, modernization and replacement of the long-term
assets.

OBJECTIVES OF THE STUDY

Following are the objectives of the study

To understand the procedure followed in BHEL for Capital Budgeting.

To understand the schemes for which Capital Budgeting is done.
To study the various parameters for assessing the performance of the organization.
To offer suggestions based on the findings.

NEED OF THE STUDY :

To study the Capital Budgeting process in the company and to analyze the feasibility
of the various projects taken up by the BHEL company by using capital budget technique.
SCOPE OF CAPITAL BUDGETIG DECISION :
Mechanization of a process In order to reduce costs, a firm may intend to mechanize
its existing production process by installing machine. The future cash inflows on this
investment are the savings resulting from the lowered erating costs. The firm would be
interested in analyzing whether it is worth to install the machine.

Expansion decision : Every company want to expand its existing business. In order to
increase the scale of production and sale, the company may think of acquiring new
Machinery, addition of building, merger or takeover of another business etc. this all would
require additional investment which should be evaluated in terms of future expected earnings.
Replacement decision : A company may contemplate to replace an existing machine with a
latest model. The use of new and latest model of machinery may possibly bring down
operating costs and increase the production. Such replacement decision will take with help of
capital budgeting.
Choice of equipment : A company needs an equipment to perform a certain process. Now a
choice can be made between semi- automatic or fully- automatic machine. Capital Budgeting
process helps a lot in such selections.
Product or process innovation The introduction of new product or a new process will
involve heavy expenditure and will earn profits also in the future. So, a study of capital
budgeting will be very useful and the ultimate decision will depend upon the profitability of
the product or process.
LIMITATIONS OF THE STUDY
1.

The procedures involved in Energy sector for the Capital Budgeting may vary
accordingly. Hence the suggestions cannot be generalized.

2.

The study is based on the financial data provided by the finance personnel of
the company and other reliable sources.

RESEARCH METHODOLOGY
Research is a processing which the researchers wish to find out the end result for a
given problem and thus the solution helps in future course of action. The research has been
defined as A careful Investigation or enquiry especially through search for new facts in

branch of knowledge. The present study involves the analysis of data by using various
Capital Budgeting techniques like :

NPV
PI
ROI
IRR

RESEARCH DESIGN
The research design used in this project is Analytical in nature the procedure using,
which researcher has to use facts or information already available, and analyze these to
make a critical evaluation of the performance.
DATA COLLECTION

Primary Sources
1. Data are collected through personal interviews and discussion with
Finance executives.
2. Data are collected through personal interviews and discussion with

Material Planning - Deputy Manager.

Secondary Sources
1. From the annual reports maintained by the company.
2. Data are collected from the companys website.
3. Books and journals pertaining to the top.

REVIEW OF LITERATURE

CAPITAL BUDGETING

MEANING OF A BUDGET:
A budget is the monetary or/and quantitative expression of business plans and policies
to be pursued in the future period of time. The term budgeting is used for preparing budgets
and other procedures for planning, co-ordination and control of business enterprise.
According to CIMA, Official terminology, A budget is a financial and /or quantitative
statement prepared prior to a defined period of time, of the policy to be pursued during that
period for the purpose of attaining a given objective. In the words of Crown and Howard, A
budget is a pre-determined statement of management policy during a given period which
provides a standard for comparison with the results actually achieved.
The actual performances of the past, the present situation and likely trends in the
future are considered while preparing budgets.

CLASSIFICATION AND TYPES OF BUDGETS:

The budgets are usually classified according to their nature. The following are the
types of budgets which are commonly used.

(A)CLASSIFICATION ACCORDING TO TIME

1. Long-Term budgets.
2. Short-Term budgets.

3. Current budgets.
(B) CLASSIFICATION ON THE BASIS OF FUNCTIONS
1. Operating budgets.
2. Financial budgets.
3. Master budgets.
(C) CLASSIFICATION ON THE BASIS OF FLEXIBILITY
1. Fixed budget.
2. Flexible budget.

(A) Classification according to time

1.

Long Term Budgets. The budgets are prepared to depict long term planning of
the business. The period of long term budgets varies between five to ten years.
The long term planning is done by the top level management. Long time
budgets are prepared for some sectors of the concern such as capital
expenditure, research and development, long term finance; etc .These budgets
are useful for those industries where gestation period is long
Ex: machinery, electricity, engineering, etc.

2.

Short-term budgets. These budgets are generally for one or two years and are
in the form of monetary terms. The consumers goods industries like sugar,
cotton, textile, etc. use short term budgets.

3.

Current Budgets. The period of current budgets is generally of months and

weeks. These budgets relate to the current activities of the business.

(B) Classification on the basis of functions

1.

Operating Budgets. These budgets relate to the different activities or

operations of a firm. The number of such budgets depends up on the size and
nature of business. The commonly used operating budgets are:
(a) Sales Budget
(b) Production Budget
(c) Production cost Budget
(d) Purchase Budget
(e)Raw material Budget
(f) Labor Budget
(g) Plant utilization Budget
(h) Manufacturing Expenses or works overhead budget
(i) Administrative and selling expenses Budget.

2.

Financial budgets. Financial budgets are concerned with cash receipts and
disbursement, working capital, capital expenditure, financial position and
results of business operations. The commonly used financial budgets are:
(a) Cash Budget.
(b) Working capital Budget.
(c)Capital expenditure Budget

(d) Income statement Budget

3.

Master Budget. In this type of budget various functional budgets are integrated
into master budget.

(C) Classification on the basis of flexibility

1. Fixed budget. The fixed budgets are prepared for a given level of activity; the
budget is prepared before the beginning of the financial year. If the financial year
starts in January then the budget will be prepared a month or two months earlier
either in Nov or Dec. The changes in expenditure arising out of the anticipated
changes will not be adjusted in the budget. Fixed budgets are suitable under static
conditions.

2. Flexible budgets. A flexible budget consists of a series of budgets for different

level of activity. It varies with the level of activity attained. A flexible budget is
prepared after taking into consideration unforeseen changes in the conditions of
the business.

Some important budgets

1. Sales budget
2. Production budget
3. Cost of production budget
4. Materials budget

5. Direct labor budget

6. Manufacturing overheads cost budget
7. Selling and distribution overhead budget
8. cost budget
9. Capital expenditure budget
10. Master budget
INTRODUCTION FOR CAPITAL BUDGETING:
A truck manufacturer is considering investment in a new plant; an airliner is planning
to buy a fleet of jet aircrafts; a commercial bank is thinking of an ambitious computerization
programme; a pharmaceutical firm evaluating a major R&D programme.
All these situations involve a capital expenditure decision. Essentially each of them
represents a scheme for investing resources which can be analyzed and appraised reasonably
independently.
The basic character of a capital expenditure is that it typically involves a current
outlay of funds in the expectation of a stream of benefits extending far into future.
This definition of capital expenditure is not necessarily synonymous with how capital
expenditure is defined in accounting. A capital expenditure from the accounting point of view
is an expenditure that is shown as an asset on the balance sheet. This asset, except in the case
of a non-depreciable asset like land, is depreciated over its life. In

accounting, the

classification of an expenditure as capital expenditure or revenue expenditure is governed by

certain conventions, by some provisions of law, and by the managements desire to enhance
or depress reported profits.

Capital budgeting is a process of planning expenditures incurred on assets whose cash flow is
expected to range beyond one year. In other words, it is defined as a process that requires
planning for setting up budgets on projects expected to have long-term implications. It can be
used for processes such as the purchase of new equipment or launching of a new product in
the market. Businesses prefer to intricately study a project before taking it on, as it has a great
impact on the company's financial performance.
Some of the projects that use capital budgeting are investments in property, plants, and
equipment, large advertising campaigns, and research and development projects.
The success of a business depends on the capital budgeting decisions taken by the
management. The management of a company should analyze various factors before taking on
a large project. Firstly, management should always keep in mind that capital expenditures
require large outlays of funds. Secondly, firms should find modes to ascertain the best way to
raise and repay the funds. The management should also keep in mind that capital budgeting
requires a long-term commitment.
The requirement for relevant information and analysis of capital budgeting has paved the way
for a series of models to assist firms in amassing the best of the allocated resources. One of
the oldest methods used is the payback model; the process determines the length of time
required for a business to recover its cash outlay. Another model, known as return on
investment, evaluates the project based on standard historical cost accounting estimates.
Popular methods of capital budgeting include net present value (NPV), discounted cash flow
(DCF), internal rate of return (IRR), and payback period.
While working with capital budgeting, a firm is involved in valuation of its business. By
valuation, cash flow is identified and discounted at the present market value. In capital
budgeting, valuation techniques are undertaken to analyze the impact of assets instead of
financial assets.

The importance of capital budgeting is not the mechanics used, such as NPV and IRR, but is
the varying key involved in forecasting cash flow. The importance of capital budgeting is not
only its mechanics, but also the parameters of forecasting the incurrence of cash in the
business
Capital budgeting is vital in marketing decisions. Decisions on investment, which take time
to mature, have to be based on the returns which that investment will make. Unless the
project is for social reasons only, if the investment is unprofitable in the long run, it is unwise
to invest in it now.
Often, it would be good to know what the present value of the future investment is, or how
long it will take to mature (give returns). It could be much more profitable putting the
planned investment money in the bank and earning interest, or investing in an alternative
project.
Typical investment decisions include the decision to build another grain silo, cotton
gin or cold store or invest in a new distribution depot. At a lower level, marketers may wish
to evaluate whether to spend more on advertising or increase the sales force, although it is
difficult to measure the sales to advertising ratio.
The key function of the financial management is the selection of the most profitable
assortment of capital investment and it is the most important area of decision-making of the
financial manger because any action taken by the manger in this area affects the working and
the profitability of the firm for The need of capital budgeting can be emphasised taking into
consideration the very nature of the capital expenditure such as heavy investment in capital
projects, long-term implications for the firm, irreversible decisions and complicates of the
decision making. Its importance can be illustrated well on the following other grounds:-

(1) Indirect Forecast of Sales. The investment in fixed assets is related to future sales of the
firm during the life time of the assets purchased. It shows the possibility of expanding the
production facilities to cover additional sales shown in the sales budget. Any failure to make
the sales forecast accurately would result in over investment or under investment in fixed
assets and any erroneous forecast of asset needs may lead the firm to serious economic
results.

(2) Comparative Study of Alternative Projects Capital budgeting makes a comparative

study of the alternative projects for the replacement of assets which are wearing out or are in
danger of becoming obsolete so as to make the best possible investment in the replacement of
assets.

For

this purpose, the profitability of each project is estimated.

(3) Timing of Assets-Acquisition. Proper capital budgeting leads to proper timing of assetsacquisition and improvement in quality of assets purchased. It is due to ht nature of demand
and supply of capital goods. The demand of capital goods does not arise until sales impinge
on productive capacity and such situation occur only intermittently. On the other hand, supply
of capital goods with their availability is one of the functions of capital budgeting.

(4) Cash Forecast. Capital investment requires substantial funds which can only be arranged
by making determined efforts to ensure their availability at the right time. Thus it facilitates
cash

forecast.

(5) Worth-Maximization of Shareholders. The impact of long-term capital investment

decisions is far reaching. It protects the interests of the shareholders and of the enterprise
because it avoids over-investment and under-investment in fixed assets. By selecting the most
profitable projects, the management facilitates the wealth maximization of equity shareholders.

(6) Other Factors. The following other factors can also be considered for its significance:-

(a) It assist in formulating a sound depreciation and assets replacement policy.

(b) It may be useful n considering methods of coast reduction. A reduction campaign may
necessitate the consideration of purchasing most up-todate and modern equipment.
(c) The feasibility of replacing manual work by machinery may be seen from the capital
forecast be comparing the manual cost an the capital cost.

(d) The capital cost of improving working conditions or safety can be obtained through
capital expenditure forecasting.
(e) It facilitates the management in making of the long-term plans an assists in the
formulation of general policy.

(f) It studies the impact of capital investment on the revenue expenditure of the firm such as
depreciation, insure and there fixed assets.
Capital budgeting is very obviously a vital activity in business. Vast sums of money can be
easily wasted if the investment turns out to be wrong or uneconomic. The subject matter is
difficult to grasp by nature of the topic covered and also because of the mathematical content
involved. However, it seeks to build on the concept of the future value of money which may

be spent now. It does this by examining the techniques of net present value, internal rate of
return and annuities. The timing of cash flows are important in new investment decisions and
so the chapter looks at this "payback" concept. One problem which plagues developing
countries is "inflation rates" which can, in some cases, exceed 100% per annum. The chapter
ends by showing how marketers can take this in to account.
Capital budgeting versus current expenditures
A capital investment project can be distinguished from current expenditures by two features:
a) Such projects are relatively large.
b) A significant period of time (more than one year) elapses between the investment
outlay and the receipt of the benefits..
As a result, most medium-sized and large organizations have developed special procedures
and methods for dealing with these decisions. A systematic approach to capital budgeting
implies:
a) the formulation of long-term goals
b) the creative search for and identification of new investment opportunities
c) classification of projects and recognition of economically and/or statistically dependent
proposals
d) the estimation and forecasting of current and future cash flows
e) a suitable administrative framework capable of transferring the required information to the
decision level

f) the controlling of expenditures and careful monitoring of crucial aspects of project

execution
g) a set of decision rules which can differentiate acceptable from unacceptable alternatives is
required.

THE CLASSIFICATION OF INVESTMENT PROJECTS

a) By project size
Small projects may be approved by departmental managers. More careful analysis and Board
of Directors' approval is needed for large projects of, say, half a million dollars or more.
b) By type of benefit to the firm

an increase in cash flow

a decrease in risk
an indirect benefit (showers for workers, etc).

c) By degree of dependence

mutually exclusive projects (can execute project A or B, but not both)

complementary projects: taking project A increases the cash flow of project B
substitute projects: taking project A decreases the cash flow of project B.

d) By degree of statistical dependence

Positive dependence
Negative dependence
Statistical independence.

e) By type of cash flow

Conventional cash flow: only one change in the cash flow sign

e.g. -/++++ or +/----, etc

Non-conventional cash flows: more than one change in the cash flow sign,

e.g. +/-/+++ or -/+/-/++++, etc.

THE ECONOMIC EVALUATION OF INVESTMENT PROPOSALS
The analysis stipulates a decision rule for investing in projects :
I) accepting or
II) rejecting
THE TIME VALUE OF MONEY
Recall that the interaction of lenders with borrowers sets an equilibrium rate of interest.
Borrowing is only worthwhile if the return on the loan exceeds the cost of the borrowed
funds. Lending is only worthwhile if the return is at least equal to that which can be obtained
from alternative opportunities in the same risk class.
The interest rate received by the lender is made up of:
i) The time value of money: the receipt of money is preferred sooner rather than later. Money
can be used to earn more money. The earlier the money is received, the greater the potential
for increasing wealth. Thus, to forego the use of money, you must get some compensation.

ii) The risk of the capital sum not being repaid. This uncertainty requires a premium as a
hedge against the risk, hence the return must be commensurate with the risk being
undertaken.
iii) Inflation: money may lose its purchasing power over time. The lender must be
compensated for the declining spending/purchasing power of money. If the lender receives no
compensation, he/she will be worse off when the loan is repaid than at the time of lending the
money.
a) Future values/compound interest
Future value (FV) is the value in dollars at some point in the future of one or more
investments.
FV consists of:
i) the original sum of money invested, and
ii) the return in the form of interest.
The general formula for computing Future Value is as follows:
FVn = Vo (l + r)n
where
Vo is the initial sum invested
r is the interest rate
n is the number of periods for which the investment is to receive interest.
Thus we can compute the future value of what V o will accumulate to in n years when it is
compounded annually at the same rate of r by using the above formula.

CHARACTERISTICS OF CAPITAL BUDGETING:

Capital expenditures represent the growing edge of a business. Capital expenditures have
three distinctive features:
1. They have long-term consequences.
2. They often involve substantial outlays.
3. They may be difficult or expensive to reverse.
Capital budgeting is a most important issue in corporate finance. How a firm finances
its investments (the capital structure decision) and how it manages its short-term operations
are definitely issues of concern but how it allocates its capital (the capital budgeting decision)
really reflects its strategy and its business. That is why the process of capital budgeting is also
referred to as strategic asset allocation.
Most firms have numerous investment opportunities before them. Some are valuable
while others are not. The essence of financial management is to identify which are which.

DEFINITION OF CAPITAL BUDGETING:

Capital Budget may be defined as the firms decision to invest its current funds most
efficiently in the long-term assets in anticipation of an expected flow of benefits over a series
of years. Therefore it involves a current outlay or series of outlay of cash resources in return
for an anticipated flow of future benefits. The long-term assets are those, which affect the
firms operations beyond the one year period. The firms investment decisions would

generally include expansion, acquisition, modernization and replacement of the long-term

assets.
IMPORTANCE
Capital budgeting decisions are most crucial and critical business decision and are
important due to the following reasons:
a. INVOLVEMENT OF HEAVY FUNDS :
Capital budgeting decisions require large capital outlays. It is therefore
absolutely necessary that the firm should be carefully plan its investment program
so that it may get the finances at the right time and they are put to most profitable
use.
b. LONG-TERM IMPLICATION
The firm will feel the effect of capital budgeting decisions over a long period,
and therefore they have a decisive influence on the rate and direction of the
growth of the firm.
c. IRREVERSIBLE DECISION:
In most cases these decisions are irreversible this is because it is very difficult
to find a market for the capital assets. The only alternative will be to scrap the
capital assets so purchase and sell them at substantial loss in the event of the
decision proved wrong.
d. FUTURE EVENTS:
The capital budgeting decisions require an assessment of future events which
are uncertain. It is really a difficult task to estimate the probable future event, the

probable benefits and costs accurately in quantitative terms because of economic,

political, social, and technological factors.
e. IDENTIFY OPPORTUNITIES
As a business owner or entrepreneur, you are often presented with many
different potential opportunities. You could go in a number of different directions
as a company. The first step in the capital budgeting process is identifying which
opportunities are available to you at the time. Before you can make a decision he
have to know what is available first.
f. ASSESS OPPORTUNITIES
Once you have identified the possible opportunities for your business, the
next step in the process is to assess each opportunity individually. You to compare
each opportunity against your vision for the company and the mission statement.
Look at the values of each opportunity and see if they match with your own
values. Many of the potential opportunities can be eliminated in the step before
you can get into the financial information. You want only pursue opportunities that
match your business plan.
g. CASH FLOW ASSESSMENT
Another vital part of the capital budgeting process is cash flow assessment.
When looking at a new project, you to come up with a cash flow plan for it. You
need to estimate the amount of cash that will take to complete the project and how
much cash it will require going forward. This often requires the consultation of
several different experts. For example, if you are considering starting a new plant
for your business, you will need to consult with an architect and possibly a builder

to determine how much it would cost. If building is not your expertise, do not rely
on guesstimates for your information.
The second part of the cash flow assessment process helps you determine
how much money are project could bring in. When calculating these numbers do
not ever use the best case scenario. Use numbers that are more realistic for your
assessment. This part of the process helps you determine whether the project is
viable or not.
h. MAKING DECISIONS
Ultimately, the objective of capital budgeting is to help you make
decisions that are smart for your business. Taking the necessary steps to evaluate
each opportunity can help you avoid disastrous consequences for your business. If
these steps are not taken, you can take on a project that does not bring any value to
your company. Ultimately, it could prove to be the last mistake your company
remakes. Therefore, the capital budgeting process is crucial to consider before
making any big decisions for any type of project.
The need of capital budgeting can be emphasized taking into consideration
the very nature of the capital expenditure such as heavy investment in capital
projects, long-term implications for the firm, irreversible decisions and
complicates of the decision making. Its importance can be illustrated well on the
following other grounds:The investment in fixed assets is related to future sales of the firm during
the life time of the assets purchased. It shows the possibility of expanding the
production facilities to cover additional sales shown in the sales budget. Any
failure to make the sales forecast accurately would result in over investment or

under investment in fixed assets and any erroneous forecast of asset needs may
lead the firm to serious economic results.
Capital budgeting makes a comparative study of the alternative projects for
the replacement of assets which are wearing out or are in danger of becoming
obsolete so as to make the best possible investment in the replacement of assets.
For this purpose, the profitability of each projects is estimated.
Proper capital budgeting leads to proper timing of assets-acquisition and
improvement in quality of assets purchased. It is due to ht nature of demand and
supply of capital goods. The demand of capital goods does not arise until sales
impinge on productive capacity and such situation occur only intermittently. On
the other hand, supply of capital goods with their availability is one of the
functions of capital budgeting.
Capital investment requires substantial funds which can only be arranged
by making determined efforts to ensure their availability at the right time. Thus it
facilitates cash forecast.
The impact of long-term capital investment decisions is far reaching. It
protects the interests of the shareholders and of the enterprise because it avoids
over-investment and under-investment in fixed assets. By selecting the most
profitable projects, the management facilitates the wealth maximization of equity
share-holders.

The following other factors can also be considered for its significance:(a) It assist in formulating a sound depreciation and assets replacement policy.

(b) It may be useful n considering methods of coast reduction. A reduction

campaign may necessitate the consideration of purchasing most up-todate and
modern equipment.
(c) The feasibility of replacing manual work by machinery may be seen from the
capital forecast be comparing the manual cost and the capital cost.
(d) The capital cost of improving working conditions or safety can be obtained
through capital expenditure forecasting.
(e) It facilitates the management in making of the long-term plans an assists in the
formulation of general policy.
(f) It studies the impact of capital investment on the revenue expenditure of the
firm such as depreciation, insure and there fixed assets.
Capital rationing
Firms may have to choose among profitable investment opportunities because of the limited
financial resources. In this article we shall discuss the methods of solving the capital
budgeting problems under capital rationing. We shall show that the net present value is the
most valid section rule even under the capital rationing situations.
A firm should accept all investment projects with positive net present value in order to
maximize the wealth of shareholders. The net present value rule tells us to spend funds in the
projects until the net present value of the last project is zero.
Capital rationing refers to a situation where the firm is constrained for external, or self
imposed, reasons to obtain necessary funds to invest in all investment projects with positive
net present value. Under capital rationing, the management has not simply to determine the
profitable investment opportunities, but it has also to decide to obtain that combination of the
profitable projects which yields highest net present value within the available funds

Capital rationing may rise due to external factors or internal constraints imposed by the
management. Thus there are two types of capital rationing.

External capital rationing

Internal capital rationing

External capital rationing

External capital rationing mainly occurs on account of the imperfections in capital markets.
Imperfections may be caused by deficiencies in market information, or by rigidities of
attitude that hamper the free flow of capital. The net present value (NPV) rule will not work
if shareholders do not have access to the capital markets. Imperfections in capital markets
alone do not invalidate use of the net present value (NPV) rule. In reality, we will have very
few situations where capital markets do not exist for shareholders.
Internal capital rationing
Internal capital rationing is caused by self imposed restrictions by the management. Various
types of constraints may be imposed. For example, it may be decide not to obtain additional
funds by incurring debt. This may be a part of the firms conservative financial policy.
Management may fix an arbitrary limit to the amount of funds to be invested by the divisional
managers. Sometimes management may resort to capital rationing by requiring a minimum
rate of return higher than the cost of capital. Whatever, may be the type of restrictions, the
implication is that some of the profitable projects will have to be forgone because of the lack
of funds. However, the net present value (NPV) rule will work since shareholders can borrow
or lend in the capital markets.

It is quite difficult sometimes justify the internal capital rationing. But

generally it is used as a means of financial controls. In a divisional set up, the
divisional managers may overstate their investment requirements. One way of
forcing them to carefully assess their investment opportunities and set priorities is
to put upper limits to their capital expenditures. Similarly, a company may put
investment limits if it finds itself incapable of coping with the strains and
organizational problems of a fast growth.

Investment Decisions under Capital Rationing

Firms may have to choose among profitable investment opportunities
because of the limited financial resources. In this article we shall discuss the
methods of solving the capital budgeting problems under capital rationing. We
shall show that the net present value (NPV) is the most valid section rule even
under the capital rationing situations.

A firm should accept all investment projects with positive net present value (NPV)
in order to maximize the wealth of shareholders. The net present value (NPV) rule
tells us to spend funds in the projects until the net present value (NPV) of the last
project is zero.

Capital rationing refers to a situation where the firm is constrained for external, or
self imposed, reasons to obtain necessary funds to invest in all investment projects
with positive net present value (NPV). Under capital rationing, the management
has not simply to determine the profitable investment opportunities, but it has also

to decide to obtain that combination of the profitable projects which yields highest
net present value (NPV) within the available funds.

CAPITAL BUDGETING PROCESS

Capital Budgeting is a complex process, which may be divided into the following
phases
They are :
Identification of potential investment opportunities.
Assembling of proposed investment.
Decision making.
Preparation of capital budget and appropriation.
Implementation.
Performance review.

Identification of potential Investment opportunities :

The capital budgeting process begins with the identification of potential
investment opportunities. Typically, the planning body (it may be an individual or a
committee organized formally or informally) develops estimate of future sales which
serves as the basis for setting production targets. This information in turn is helpful in
identifying required investments for the project.
Assembling of investment proposals :

Investment proposals identify by the production department and other

department is usually submitted in a standardized capital investment proposal firm.
Generally most of the proposals before they reach capital budgeting committee or
somebody who assembles them are routed through several persons. The purpose of
routing proposal through several persons is primarily to ensure that the proposal is
viewed from different angles. It also helps in creating for bringing about co-ordination
of interrelated activities.

Decision Making :
A system of rupee gateways usually characterizes capital investment decision
making. Under this system the executives are vested with the power to act the
investment proposals up certain limits. Investment requiring higher outlays needs the
approval of the board of directors.

Preparation for capital budget and appropriation :

Project involving smaller outlays, and which can decided by executives at
lower level, are often covered by a blanker appropriation for expeditions actions.
Project requiring larger outlays are included in the capital budget after necessary
approval. Before undertaking such projects, an appropriation order is usually required.
The purpose of this check is mainly to ensure that the funds position of the firm is
satisfactory at the time of implementation.
Implementation :
Translating an investment proposal into a concrete project is a complex, time
consuming and risk task. Delay in implementation, which is common can lead to

substantial cost overruns. For expeditions implementations at a reasonable cost the

following are helpful.

Adequate formulation of projects.

Use of the principle of responsibility accounting.
Use of the network techniques.

Performance review :
Performance review or post completion audit is a feedback device. It is a
means of comparing the actual performance which projected performance.

PROJECT CLASSIFICATION :
Project analysis entails time and effort. The costs incurred in this exercise must be
justified by the benefits from it. Certain projects, given their complexity and magnitude,
may warrant a detailed analysis; others may call for a relatively simple analysis. Hence
firms normally classify projects in to different categories. Each category is then analyzed
somewhat differently.
While the system of classification may vary from one firm to another, the following
categories are found in most classifications.

MANDATORY INVESTMENTS :
These are expenditures required to comply with statutory requirements. Examples of
such investments are pollution control equipment, medical dispensary, firefighting
equipment, crche in factory premises, and so on. These are often non-revenue producing

investments. In analyzing such investments, the focus is mainly on finding the most costeffective way of fulfilling a given statutory need.
REPLACEMENT PROJECTS :
Firms routinely invest in equipments meant to replace obsolete and inefficient
equipments, even though they may be in a serviceable condition. The objective of such
investments is to reduce costs (of labor, raw material and power), increase yield, and
improve quality. Replacement projects can be evaluated in a fairly straightforward manner,
though at times the analysis may be quite detailed.
EXPANSION PROJECTS :
These investments are meant to increase capacity and/or widen the distribution
network. Such investments call for an explicit forecast of growth. Since this can be risky
and complex, expansion projects normally warrant more careful analysis than replacement
projects. Decisions relating to such projects are taken by the top management.

DIVERSIFICATION PROJECTS :
These investments are aimed at producing new producing new products or services
or entering into entirely new geographical areas. Often diversification projects entail
substantial risks, involve large outlays, and require considerable managerial effort and
attention. Given their strategic importance, such projects call for a very thorough
evaluation, both qualitative and quantitative. Further they involve board of directors.
RESEARCH AND DEVELOPMENT PROJECTS :

Traditionally, R&D projects absorbed a very small proportion of capital budget in

most Indian companies. But now the companies are now allocating more funds to R&D
projects, more so in knowledge-intensive industries. R&D projects are characterized by
numerous uncertainties and typically involve sequential decision making. So, such projects
are decided on the basis of managerial judgment. Firm which rely more on quantitative
methods use decision tree analysis and option analysis to evaluate R&D projects.
MISCELLANEOUS PROJECTS :
This is a catch-all category that includes items like interior decoration, recreational
facilities, executive aircrafts, landscaped gardens, and so on. There is an standard approach
for evaluating these projects projects and decisions regarding them are based on personal
preferences of top management.

INVESTMENT CRITERIA :
Investment criteria are divided into two. They are
1. Discounting criteria
2. Non-discounting criteria

Again each of them is divided into various categories:

1. Discounting criteria
a. Net present value

b. Benefit cost ratio

c. Internal rate of return
2. Non-discounting criteria
a. Payback period
b. Accounting rate of return
A wide range of criteria has been suggested to judge the worth whileness of
investment projects. The important investment criteria, classified into two broad categories
i.e non-discounting criteria and discounting criteria.

CAPITAL BUDGETING IN PUBLIC SECTOR UNDERTAKINGS

The distinctive feature of capital budgeting in public sector undertakings is that the
boards of these enterprises are empowered to sanction capital expenditures with in certain
limits which are reviewed time to time. Capital expenditures involving larger outlay have to
be approved by the higher echelons in the government.

ROLE OF PUBLIC INVESTMENT BOARD

The Public Investment Board (PIB) set up in 1972 presently plays a pivotal role in
the appraisal and sanction of capital projects of public enterprises. The PIB is
headed by the secretary, Expenditure. Its other members are the secretaries to he
planning commission, Department of Economic affairs prime minister, Department

of public Enterprises, Ministry of Industrial Development, and the Administrative

Ministry bringing up the investment proposal before the board.

GUIDELINES PROVIDED BY THE GOVERNMENT

For almost 15 years since the commencement of the planned era, no guidelines
or manuals were provided by the central government or the planning commission to
public sector undertakings or their administrative ministries, for the preparation of
any feasibility report and detailed project report. In 1966,for the first time, the
planning commission issued a Manual on feasibility studies. Among other things,
this manual:
1. Suggested the use of various criteria like return on investment , payback period,
net present value, and internal rate of return for measuring profitability ;
2 . Laid stress on the use of net present value to be calculated at a discount rate of
12 percent, with a mention that different discount rates may have to be used for
different projects;
3. Emphasized the need for analysis of risk, though it did not suggest any
particular method for doing so; and
4. Underscored the need for assessing the national economic benefits from the
project.
A more comprehensive manual entitled guidelines for the preparation of
feasibility reports for industrial projects was issued in 1975 by the Project
Appraisal division of the planning commission. The Guidelines suggest that

projects should be appraised from the technical, commercial, financial, and

economic angles, without specifying the modes of such analysis.

The following sequence of presentation has been suggested :

1. General information on alternatives
2.

Preliminary analysis

3. Project description
4. Market analysis
5. Capital requirements and costs
6. Operating requirements and costs
7. Financial analysis
8. Social profitability analysis
In the Guidelines emphasis has been placed on the internal rate of return method
as against the net present value method that was recommended by the Manual
issued in 1996.

CAPITAL BUDGETING TECHNIQUES

A number of investment criteria or capital budgeting techniques are in use or in
practice.
They may be grouped into following categories :

1. Discounted cash flows or time adjusted

a. Net present value
b. Internal rate of return
c. Profitability index
2. Non-discounting cash flows or Traditional
a. Payback period
b. Accounting rate of return
1. Discounted cash flows
a. Net present value:
The Net present value method is the classic economic method of evaluating
the investment proposals. It is a discounted cash flow technique that explicitly
recognizes the time value of money. It correctly postulates that cash flows arising at
different time periods differ in value and are comparable only when their equivalent
present values are found out.
The exercise involved in calculating the present value is known as Discounting
and the factors by which we have multiplied the cash flows are known as discount
factors. The discount factors is given by the following expression.

PVF=1/(1+r)n
Where r is the rate of interest per annum and n is the number of years over which we are
discounting.

n
NPV of Project =

Ct

Initial Investment

t=1 (1+r)t

Ct= cash flow at the end of year t

n= life of the project
r= discount rate

properties of the NPV Rule

The net present value has certain properties that make it a very attractive decision
criterion.
NET PRESENT VALUES ARE ADDITIVE :
Because present values are measured in todays rupees they can be added. This means that if
you have two projects a and b, the net present value of the combined investment is
NPV (a+b) =NPV(a)+NPV(b)
The net present value of a package of projects is simply the.sum of the net present values of
the individual projects included in the package.
These properties has several implications:

The value of a firm can be expressed as sum of the present value of the projects in
place as well as the net present value of prospective projects.
Value of a firm =Present value of projects +NPV of expected future projects.
The first term on the right hand side of this equation capture the value of assets in
place a and the second term the value of growth opportunities.

When a firm terminates an existing project which has a negative NPV based on its
expected future cash flows, the value of the firm increases by that amount. Likewise,
when a firm undertakes a new project that has a negative NPV, the value of the firm

decreases by that amount.

When a firm divests itself of an existing project, the price at which the project is
divested affects the value of the firm. If the price is greater/lesser than the present
value of the anticipated cash flows of the project the value of the firm will

increase/decrease with the divestiture .

When a firm takes on a new project with a positive NPV, its effect on the value of the
firm depends on whether its NPV is in line with expectation. Example Hindustan
Lever Limited, is expected to take on high positive NPV projects and this expectation
is reflected in its value. Even if the new projects taken on by Hindustan Lever
Limited have positive NPV, the value of the firm may drop if the NPV is not in line

with high expectation of investors.

When a firm makes an acquisition and pays a price in excess of the present value of
the expected cash flows from the acquisition it is like taking on a negative NPV
project and hence will diminish the value of the firm.

INTERMEDIATE CASH FLOWS ARE INVESTED AT COST OF CAPITAL

The NPV rule assumes that the intermediate cash flows of a project-that is, cash flows that
occur between the initiation and termination of the project- are reinvested at a rate of return
equal to the cost of capital.
ACCEPTANCE RULE:
The acceptance rule under the NPV method is accept the proposal if its NPV is positive and
reject the proposal if the NPV is negative . The positive NPV of a proposal signifies that the
present worth of its in flows is more than the present worth of its outflows. Thus the NPV

represents the excess of benefits over the cost in real term. The NPV therefore, is the change
expected in the wealth of the shareholder because of the acceptance of a particular proposal
in the wealth of the shareholder because of the acceptance of a particular proposal in the case
of ranking of mutually exclusive proposals, the proposals with the highest positive NPV is
given the top priority and the proposals with the lowest priority. The proposals with the
negative NPV ought to rightly be rejected.

MERITS:

It recognizes the time value of money.

It considers the total benefits arising out of the proposal over its lifetime.

The future discount rate normally varies due to long span. They can be applied in calculating
the NPV by altering the denominator.
This method is particularly useful for selection of mutually exclusive projects.
This method of project selecting is instrumental in achieving the financial objectives i.e; the
maximization of shareholder wealth.
DEMERITS:

It is difficult to calculate as well as understand it as compared to accounting rate of

return method or payback period method.

Calculation of the desired rate of return presents serious problems. Generally cost of
capital is the basis of determining the desired rate. The calculation of cost of capital is

itself complicated .Moreover, desired rate of return will vary from year to year.
This method is an absolutely measure .When two projects having different effective
lives are being compared. Normally, the project with shorter economic life is
preferred.

INTERNAL RATE OF RETURN:

The internal rate of return (IRR) of a project is the discount rate which makes its NPV equal
to zero. Internal rate of return is a percentage discount rate used in capital investment appraisal, which
bring the cost of a project and its future cash inflows into equality. It is the rate of return which
equates the present value of anticipation net cash flows with the initial outlays. The IRR is defined as
the rate which the net present value is zero. The test of profitability of unity a project is relationship

Relationship between the internal rate of return of the project and the minimum
acceptable rate of return.
ACCEPTANCE RULE:
The accept-or-reject rule, using the IRR method, is to accept the project if its internal
rate of return is higher than the opportunity cost of capital (r>k). k is also known as required
rate of return , or the cut-off, or hurdle rate. The project shall be rejected if its internal rate of
return is lower than the opportunity cost of capital (r>k). The decision maker may remain
indifferent if the internal rate of return is equal to the opportunity cost of capital.
MERITS:

It recognizes the time value of money.

It considers the total benefits arising out of proposals over its lifetime.

The future discount rate normally varies due to longer time span. This rate can

be
This method is particularly useful for the selection of mutually exclusive

projects.
The method of project selection is instrumental in achieving the financial
objectives i.e; the maximization of shareholders wealth.

DEMERITS:

It is difficult to calculate as well as to understand it as compared to accounting rate

of return method, or payback period method.

Calculation of the desired rate of return present serious problems generally cost of

capital is the basis of determining the desired rate.

The calculation of cost of capital is itself complicated. Moreover desired rate of
return vary from year to year.

PROFITABILITY INDEX :
The profitability index is also called benefit cost ratio. The profitability index is the
present value of anticipated net future cash flows divided by the initial outlay. The only
difference between the net present value method and profitability index method is that when
using the NPV technique, the initial outlay is deducted form the present value of anticipated
cash flows, whereas with profitability index approach, the initial cash outlay is used as
divisor.
PI = PV of cash inflow / initial cash investment
PAYBACK PERIOD :
The payback period is usually expressed in years it takes the cash inflow from a
capital investment project to equal to cash outflow. When deciding between two and more

competing projects the usual decision is to accept the one with the shortest payback. This
method recognizes the recovery of the original capital invested in a project. The basic
element of this method is a calculation of recovery time, by accumulation of the cash inflows
year by year until the cash inflows equal to the amount of the original investment. In simple
terms, it can be defined as the number of years required to recover the cost of the investment.

MERITS :
It is simple to apply and easy to understand.
In case of capital rationing a company is compelled to invest in projects having

shortest payback period.

This method is most suitable when the future is every uncertain. The shorter the

payback period, the less risky is the project.

This method gives an indication to the prospective investor specifying when their

funds are likely to be repaid.

It does not involve assumptions about future interest rates.

DEMERITS :

It ignores the cash generation beyond the payback period.

It fails to take into account the timings of returns and the cost of capital. It fails to

consider the whole lifetime of the projects.

It does not indicate whether an investment should be accepted or rejected, unless the
payback period is compared with an arbitrary managerial target.

ACCOUNTING RATE RETURN :

The ARR method is also known as return on investment or return on capital
employed. This method employs the normal accounting technique to measure the increase in

profit expected to result from an investment by expressing the net accounting profit arising
from the investment as a percentage of that capital investment.
ARR = Avg profit after tax / Avg investment * 100

ACCEPTANCE RULE :
As an accept or reject criterion, this method will accept all those projects which
have ARR less than the minimum rate. This method would rank a project as number one if it
has highest ARR and lowest rank would be assigned to the project with lowest ARR.

MERITS :
1. It is easy to calculate because it makes use of readily available accounting
information.
2. It is not concerned with the cash flows but rather based upon profits, which are
reported in annual accounts and sent to shareholders.
3. Unlike payback period method, this method takes into consideration all the years
involved in the life of the project.
4. Where a number of capital investment proposals are being consider, a
quick decision can be taken by use of ranking the investment proposals.

CAPITAL BUDGETING IN BHEL

The capital budgeting in BHEL is based on capital budget manual, which covers the
following aspects.
1. Capital funds budget

Five year plan

Annual plan exercise

Non plan budget exercise

Feasibility report

2. Progress reporting and monitoring

3. Replacement guidelines
4. Government guidelines

Capital Fund Budget :

Capital funds budget is what enables a program of action on all capital expenditure
items to be grouped in one consolidated document. This outlines the proposal for creation of
new assets addition for increase in production, diversification and reduction of coast ensures
how these ventures will be financed over a given period, it includes five years plan, annual
plan exercise and non-plan budget exercise, which are described below.
Five - Year Plan :
The government has been formulating five years plans for the economic growth.
Inline with this policy, BHEL also formulates the five years plans of the company and
submits to the government for inclusion in every five years plan of the county.
Five year plan exercise normally starts from the third year of the previous five years plan.
The schemes included in the plan approved by planning commission are prioritized for
implementation depending on the need resources etc., these schemes should be inline with
perspective plan of the country.
Annual Plan Exercise :
The capital funds budget annual plan is meant for making provisions for cash
expenditure of capital nature including the foreign exchange component where ever
necessary.
1. Revised estimate for current year.
2. Budget estimates for the ensuring year i.e., budget year.

3. Preliminary budget estimates for year following the budget year.

Non Plan Budget Exercise :
All expenditure on capital equipment like cranes, material heading equipment, special
tools and plant equipment, which are required at project sites for erection and commissioning
purpose etc., should be considered as non-plan expenditure.
Feasibility Report :
Guidelines for preparation of feasibility report. For every investment a detailed
feasibility report is required to be formulated for approval of the competent authority. The
feasibility report must spell out in detail the following
Objective of the scheme / project .
Consistency with the company plans / policies.
Inputs required and their phasing.
Financial / economic analysis.
Implementation plan.
Expansion program in future if any.

Progress Reporting Monitoring :

Once the capital budget has been approved it has to be ensuring the targets laid down
regarding physical and financial progress adhered to. Any short fail in this regard is likely in
delay the completion of project and ultimately affects production program. Therefore each
project is continuously monitored at divisional level both physically and financially. For
major projects consisting more than five cores. Projects review committees are required to be

consisted having representatives from project unit and corporate office. Those committees
should met periodically to review the progress and recommenced, taking corrective action.
Replacement Guidelines :
Substantial investments have been made in the plant and machinery in all the BHEL
manufacturing divisions. Though modernization and expansion programs, new machine tools
have been added from time to time. New projects are underway increasing investments in
plant and machinery still to higher level.
Replacement of plant and machinery are needed for the following reasons.
Due to natural wear and tear .
Technological obsolescence.
Change in service requirement.
Accident.

Government Guidelines :
Reference has been made in various government manual containing guidelines /
policies, which are relevant for the capital budgeting exercise within BHEL and
with other government.

PROCEDURE FOR CAPITAL BUDGETING IN BHEL

The capital budgeting in BHEL has in four phase, which can be explained as
follows.
First Phase :

This phase involve the different aspects in approval of the proposals put forth but the
department concerned. The different steps involved are
1. A letter of requisition with the proposal is sent by the concerned department to the
R&D department. This letter contains the specification of items in the case of
replacement the need for the replacement is to be clearly specified along with the cost
estimates.
2. This proposal is forward to finance department, industrial engineering and
maintenance and services department for their consent.
3. Finance department looks into financial aspects of the proposals.
4. Industrial engineering department cheeks whether the specifications are apt of the
proposal.
5. Maintenance and service department consent.

Second Phase :

1.

The department which has sent the proposal gives the 100% specifications to the

purchase department.
2. The purchase department lists the supplies and quotations are invited.
3. After the quotations are received the proposal with the lowest cost is opted for, ask
4.
5.
6.
7.

keeping the quality of the item.

The item is then ordered.
The item ordered will received by the stores department.
The items would unpacked by the stores department and physical defects are checked.
If the item is satisfactory, it is installed in fright place.

Third Phase :

1. A representative of the supplier gives the demonstration with respect to the technical
aspects and usage of item.
2. The item is then put to use.
3. From time to time, steps are taken for its proper maintenance.
Forth Phase :
1. If the machines worn out or obsolete, it is disposed off the replacement.

PROFILE OF ORGANIZATION

INDUSTRY PROFILE

BHARATH HEAVY ELECTRICAL LIMITED

The vital role played by the BHEL today in the country is the mark of its continuous
efforts to improve the service in the nation by consultancy, manufacturing and offering
services in power sector.
This success story of BHEL however goes back to 1956 when its first plant was set up
in

BHOPAL.

Three

more

major

plants

in

HARIDWAR,

HYDERABAD

and

TIRUCHINAPALLI follow. These plants have been the core of BHELs efforts to grow and
diversify and become one of the most integrated power and industrial equipment
manufacturers in the world. The company now has 14 manufacturing units, 8 service centers
and 4 power sector regional centers, besides project sites spread all over India and abroad.
BHEL manufactures over 180 products under 30 major product groups and meets the
needs of core sector like power, industry, transmission, defense, telecommunications, oil
business etc. Its products have established an enviable reputation for high quality and
reliability. This is due to the emphasis placed all along on design, engineering and
manufacturing to international standards by acquiring and adopting some of the best
technologies developed in its own R&D centers. BHEL caters to the needs of different sectors
by designing and manufacturing according to the need of its clients in power sector.

INDUSTRIAL SECTOR :
BHEL contributes major capital equipment and systems like captive power plants
centrifugal compressors, drive turbines, heavy castings and forging etc.

Capacitors
Compressors
Diesel generating sets
Industrial motors and alternators
Gas turbines
Steam generators
Steam turbines

TRANSMISSION SECTOR:
BHEL also produces high voltage transformer an SF6 switch gears up to 400KV.
Indias first indigenous 145KV gas insulated switch gear was developed and commercialized
by BHEL. It consists of the following.

Capacitors

Control relay panels

Dry-type transformers

Energy meters

Insulators

Switch gears

Power semiconductor devices

Power system studies

OIL SECTOR:
BHEL has been supplying onshore drilling rigs, X-MAS tree valves and wellheads up
to a rating of 1000 PSI to ONGC and OIL India. It can also supply subsea wellheads, super
deep drilling rigs, desert rigs and hebi rigs.

TRANSPORTATION SECTOR:
Most of the trains in the Indian railways are equipped with BHELs traction and
traction control equipment. Indias first underground metro at Calcutta runs on drives and
controls supplied by BHEL. The company also manufactures broad gauge 3900HP AC
locomotives, 5000/4600HP AC/DC locomotives. BHEL has acquired the technology for 3
phase electrics for 6000HP AC locomotives.

NON CONVENTIONAL ENERGY:

Mini/Micro hydro sets

Solar lanterns

Solar photovoltaics

Solar water heating system

Wind electric generators

TELECOMMUNICATION:
BHEL also manufactures MAX-XL systems based on C DOT technology and plans to make
other range of telecommunication equipment as well.

STEAM TURBINES

BHEL has the capability to design, manufacture and commission steam turbines of up to 100
MW rating for steam parameters ranging from 30 bars to 300 bars pressure and initial &
reheat temperatures up to 600 0 C. Steam Germany covering the whole range of requirements
for Drive, Cogeneration, Captive Power, Utility and Combined Cycle applications BHEL
today is fully equipped to provide comprehensive service to clients covering system
engineering, equipment design and turnkey erection and commission.

STEAM TURBINES

BHEL presently has manufactured Turbo-Generators of ratings upto 560 MW and is in the
process of going upto 660 MW. It has also the capability to take up the manufacture of ratings
up to 1000 MW suitable for thermal power generation, gas based and combined cycle power
generation as-well-as for diverse industrial applications like Paper, Sugar, Cement,
Petrochemical, Fertilizers, Rayon Industries, etc, Based on proven designs and know-how
backed by over three decades of experience and accreditation of ISO 9001, the Turbogenerator is a product of high-class workmanship and quality. Adherence to stringent qualitychecks at each stage has helped BHEL, to secure prestigious global orders in the recent past
from Malaysia, Malta, Cyprus, Oman Iraq, Bangladesh, Sri Lanka and Saudi Arabia.
The successful completion of the various export projects in a record time is a testimony of
BHELs performance.

PUMPS

BHEL started manufacture of Pumps during the mid-sixties under technical collaboration
with M/s Sigma Lutin, Czechoslovakia, to meet the requirements of 60 MW, 110 MW and
210 MW thermal power stations, the scope of which was widened to meet the requirements

of power plants up to 500 MW, with the help of another collaboration with M/s Weir Pumps,
U.K. BHEL has also made some in-house product development to gain spin off benefits from
the above collaboration as well as to develop new pumps to meet the requirements of
Combined Cycle Power plants.BHEL has undertaken a design up-gradation and retrofit of the
existing 200 KHI Boiler Feed pumps Inside Stators with energy efficient hydraulics and
cartridge design internals under technical tie-up with M/s Sulzer Pumps, Germany, and
recommended the upgraded 200 KHI-S Boiler Feed pump to all customers of 110 MW & 210
MW Power Stations operating with the earlier Czech design for increase of pump availability
and reliability and also considerable reduction in operational costs.

PULVERIZERS

BHEL manufactures mills for pulverized coal fired Thermal and Industrial boilers, BHEL till
date has manufactured over 1200 bowl mills and over 100 tube mills, operating in different
coal fired Thermal power stations in India.
BHEL has absorbed technology from world leader M/s. Combustion Engineering USA for
bowl mills. The specific range 583 XRP/XRS to 1043 XRP covers the-state-of-the-art mills
required for the India market and are supplied as Industrial boilers as-well-as Utility boilers
of 60 MW, 110 MW, 210 MW & 500 MW capacity.

OIL RIGS

BHEL started manufactures oil field equipment in collaboration with M/s UA Steel Engineers
and Consultants USA (National Oil Well), M/s Skytop Brewster USA, M/s Branham
Industries USA, M/s IRI International, USA. After successful absorption of technology,
BHEL now has the capability to manufacture conventional deep drilling rigs up to a depth of
9000 meters, mobile rigs to a depth of 3000 meters and well servicing rigs to a well depth of
6100 meters.

SWITCH GEARS :
BHEL is involved in the design, commissioning and service of a wide range of
switch gears catering to various applications like power station auxiliaries, power
distribution process industries, rural electrification, open cast mines, electric traction and
other special applications, BHEL started manufacturing circuit breakers in 1965 in
collaboration with ASIA, Sweden and to keep pace with the technological advancement
and to meet customer requirements.
Switchgear is of following types:

Minimum of circuit backers (33KV-220KV)

Sf6 circuit breaker (132KV-400KV)

Vacuum circuit breakers (3.3KV-33KV)

SOLAR WATER HEATING SYSTEM:

BHEL a pioneer in the field of design manufacturing and installation of solar water
heating systems in the country till date installed systems covering more than 74000m2 of
absorber area of capacity over 37lakh liters per day. The largest Solar water heating system is
used at Dr. Will Mar Schwable India Pvt.ltd., Noida.
In the BHEL make solar collector, stabilize efficiency values up to 65% is assured
under normal circumstances over a long period without degradation

COMPANY'S VISION, MISSION AND OBJECTIVES:

VISION:

A world class, innovative, competitive and profitable engineering enterprise

providing total business solutions.

MISSION:

To be the leading enterprise providing quality products

systems

and

services in the field of energy, transportation, industry, Infrastructure and other

potential areas.
VALUES:
* Meeting commitments made to external & internal customers
*Foster learning, creativity & speed of response.

*Respect for dignity & potential of Individuals.

*Loyalty and pride in the company.
* Team playing.
*Zeal to excel.
*Integrity and fairness in all matters.

OBJECTIVES:
GROWTH:
To ensure a steady growth by enhancing the competitive edge of BHEL in existing business,
new areas and international operation so as to fulfill national expectations from BHEL
PROFITABILITY:
To provide a reasonable and adequate return on capital employees, primarily through
Improvements in operational efficiency, capacity utilization and productivity and generate
adequate internal resources to finance the company's growth.
Confidence by providing increased value for this money through international standards of
product quality, performance and superior customer service.
TECHNOLOGY:

To achieve technology excellence in operations by development of indigenous technologies

to and efficient absorption and adaptation of imported technologies to suit business needs
and priorities and provide a competitive advantage of the company
IMAGE:
To fulfill the expectations which stockholders like government as owners, employees,
customers and the country at large have from BHEL.

SWOT ANALYSIS:
The strengths, weakness, opportunities and threats, which are experienced
By BHEL as a growing concern, have been summed up in the following lines:
STRENGTHS:
*Excellent state of art facilities.
*Good working condition.
*Rapport between management and Union.
*Products manufactured to International quality.
*Low labour cost and low manufacturing cost.
*Vast pool of trained man power.

WEAKNESSES:
*System implementation inadequate.
*No financial Package.
*Inadequate compensation payable to employees.
*Excess manpower.

OPPORTUNITIES:
*Growing power sector machinery.
*Liberalization has opened up the market.
*Navaratna company status.
*Dominant player in domestic market.
*Export potential growing.
THREATS:
*Liberalization -Entry of MNC'S/ private sector-more Compensation.
*MNC'S weaning away good employees with good attractive salaries.
*Govt. Taxation policy-against manufacturing sectors.
*Poor infrastructure.

*Dumping of goods.
*Attractive credit policy by FFI'S and MNC'S.
KEY FACTORS:
*45-CNC M/C tools including CNC 5-axis M/C Center.
*50 ton balancing tunnel
*Computerized attendance system
*Series-39 main frame computers-with multiprocessor system
*Capacity-200 remote terminals with 13 bulk printers
*CAD/CAM,PC-LAN{Local area network}
*More than 200 personal computers with data exchange facilities with mainframe
computer
WELFARE:
*Six schools,2junior Colleges and 1 womesn's degree college
*School for mentally retarded.
*Houses on ownership basis to employees-LIG-1000,MIG-2500 and HIG-460
*Adopted 3 villages provided basic amenities.

COMPANY PROFILE

ABOUT B.H.E.L RAMACHANDRAPURAM UNIT:

About 30km away from the city centre on the fringes of the historical city of the
qutub shah kings lies the hub of the Ramachandrapuram unit of Bharat heavy electrical
limited, Hyderabad made a beginning in 1965 with the idea of "Bringing power to the
people".
The success story of B.H.E.L, Ramachandrapuram has its roots in its Commitments
to the nation's economic growth, towards which it has set high standard for itself. Striving
hard to take part in the building of a Strong and self reliant India.
B.H.E.L started its operations, initially by manufacturing 12MW,60MW and
110MW capacity steam turbines, generators and auxiliaries for the power and the industry
sector with collaboration of SKODA of CZECHOSLOVAKIA.
Realizing the need for diversification, B.H.E.L Hyderabad soon ventured in To
other areas absorbing latest technologies from world leaders to meet Emerging challenges
and the needs of the country. Steam turbines , Gas Turbines Turbo generators Compressors,

Pumps, Switch Gears, Oil Field Equipment, pulverizing mills, Heat exchangers including a
host of auxiliaries, on now form the profile of products at B.H.E.L, Hyderabad..

INTERNATIONAL OPERATIONS:
BHEL has exported its equipment and services to over 50 countries. In Malaysia,
BHEL has supplied 80% of the Boilers besides several hydro sets and gas turbines. BHEL
equipments are in operation in Malta, Cyprus, Saudi Arabia, Oman, Egypt, Cyprus, Libya,
Greece, Bangladesh, Srilanka, Iraq, and Australia, etc. BHEL exports turnkey power projects
of thermal, hydro, abd gas based types , substation projects, rehabilitation projects, besides a
wide variety of products like insulators, transformers, valves motors, traction generators and
services for renovation and modernization and operation power station.

RESEARCH AND DEVELOPMENT [R&D]:

BHEL is one the few companies worldwide involved in development of Integrated
Gasification Combined Cycle[IGCC] technology, which would usher in clean coal
technology. BHEL R&D efforts have produced several new products. Some of the recent
successful R&D products are automated storage retrieval systems, automated guided vehicles
for material transportations, automatic robotic welding systems.
HUMAN RESOURCES DEVELOPMENT (HRD)
The greatest strength of BHEL is its highly skilled and committed people. Every
employee is given equal opportunity to develop himself and improve his position.

Continuous training and retaining, a positive work culture and participative style of
management have led to the development of a motivated work force and enhanced
productivity and quality.

ORGANISATION STRUCTURE
B.H.E.L a public sector undertaking is a company form of organization with
corporate functions, Business sectors and Operating units under the control of Chairman &
Managing director reporting to the Board of directors.
Directors individually deal with corporate functions with the help of Executives
Directors/ General Managers in-charge.
Each unit is headed by an Executive Director /General Managers in-charge.
MANPOWER STRENGTH IN B.H.E.L
The highly trained and motivated manpower of B.H.E.L is its biggest asset.
The total number of regular employees working in B.H.E.L, RC PURAM UNIT is
6358 out of this, Executives are 1587, supervision are 1200 and the Non-supervisors are
3471 this work force is an unending reservoir of talent, which alone can transform the
company in to a global player it wants to be.

The vision of B.H.E.L becoming a truly Indian company deeply imbibed in our rich
culture and heritage is neither a dream nor too distant a reality
OBJECTIVES OF B.H.E.L:
To achieve and maintain a leading position as supplier of quality equipment,
Systems and services to serve the National & International Markets in the field of energy.
The areas of interest would be conversion, Transmission and Utilization & Market
leadership.

FINANCE DEPARTMENT IN B.H.E.L HYDERABAD

Additional General manager/Finance heads the finance department at B.H.E.L Hyderabad.
It is segregated into different sub groups reporting to Additional General Manager/ Finance.
Finance department is organized in to Product Wing and Centralized wing.
Product Wing is divided into various products like TCGT, EM, HEF, PUMPS, SG,
PULV, F&S, WORKS & MISC, ED&ST, BUDGET & MONITORING ETC.
Each product groups deals with all types of finance and Accounting relating to that
product wise concurrence to proposals for Procurement and incurring expenditure, material
accounting, cost accounting sales accounting, budget preparation, and other miscellaneous
activities relating to that product.
Centralized Wing deal with Establishment matters pertaining to all employees of the
unit, Cash management dealing with total cash management of the unit, Books section deal
with preparation of annual accounts and Taxation matters, Export incentive section deal

with all export incentive matters, stock verification and Productivity groups related to those
subjects.
In addition, there is an internal audit, which audits all the functions of the unit and
directly reporting to corporate office.
As it is a product form of organization, Financial Accounting system is desired to
meet the requirement of operation.
The flow of authority and responsibility has definite forms of hierarchy ranging from
Additional General Manager to the Clerical cadre.
BHEL today enjoys national and international presence and it is ranked among the top
12 companies in the world manufacturing power generation equipment.
The first plant of what is today known as BHEL was established nearly 40 years ago in
1956 at Bhopal and was the genesis of the Heavy electrical equipment industry in India.
A country wide network of 14 BHEL manufacturing units is spread across Bangalore,
Bhopal, Hardwar, Tiruchirapalli, Hyderabad, Ran pet, jagishpur, Reaper, goindwal,
Jhansi, Chennai, Varanasi and Gurgoan in addition to a number of service division all
over the country.
B.H.E.Ls wide range of Products Caters to the need of Power generation for
Thermal, Hydro and Nuclear power station, Transmission, Transportation, Industry, Oil
and Gas and Non Conventional energy.
B.H.E.Ls collaboration with world leaders help in keeping it abreast of the Latest
technologies in the field, BHEL is well known for reaching power to the people.

But the cornerstone of its philosophy is anchored on its endeavor to offer quality
products through dedicated service.
The BHEL has emerged as an industrial empire that has carved a niche as a major
power generating equipment manufacturer in India.
The operation of BHEL is organized around business sectors to provide a strong Market
orientation.
These business sectors are power, Industry and International operations.
The company has been chosen as one of the NAVARATNA public sector Enterprise,
which is to be supported by the government in their endeavor.
To become future global players, a strong work force of 53,000 dedicated personnel
provides this assurance in ample measure.
TOTAL EMPLOYEES

TOTAL EMPLOYEES

TOTAL ASSETS

29352 MILLION

REVENUE

18.6% Rs 4430 MILLION

TURNOVER

5000 CRORE

PROFIT

35000 CRORE